Freeman

FEATURE

For-Profit vs Non-Profit: An Arbitrary Divide?

JUNE 23, 2014 by JULIAN ADORNEY

Many of us of a certain age grew up watching Reading Rainbow, a children’s program aimed at encouraging kids to read. It’s come back in a different form: Reading Rainbow’s energetic owner, LeVar Burton, used Kickstarter a few days ago to relaunch the popular program as an education supplement in schools.

The Washington Post was not impressed.

Their problem? Reading Rainbow has returned, not as a non-profit, but as a company. Kickstarter, they claim, is for “charities, start-ups, independent artists, (and) small business owners.” The Post argues that “It’s not supposed to be co-opted by companies with profit motives and private investors of their own.”

In this claim, The Post is exactly wrong: Kickstarter encourages backing for companies but prohibits fundraising for charity. Its second-most successful project to date was Ouya, a video game console that raised over $8.5 million dollars. But even if The Post's Kickstarter claim was wrong, it does touch on a reality of donations in America: We are often willing to donate to a charity but rarely willing to contribute to a company.

This behavior is foolish, because the non-profit and for-profit divide is largely meaningless. Both charities and companies live or die on their ability to create value. Both attract revenue in excess of costs. And both can make the world a better place, especially when they have similar markets.

Walmart, for instance, is a for-profit enterprise that focuses on a poor target market. By creating downward pressure on prices, it saves the average family roughly $2,500 per year, whether or not those families shop there. In terms of outcomes, that’s not structurally different from a charity donating $2,500 per year to poor families.

Why, then, should we consider backing via Kickstarter a philanthropic charity but not to a for-profit enterprise?

The cost of business

One reason, perhaps, is because when we donate money, we expect it to help the disadvantaged. We recognize that charities have lower overhead; Eugene Steuerle, senior fellow at the Urban Institute, argues, “Many (but not all) nonprofits have lower wage scales than business or government.” Because of this, we believe that more of our donation will go to those whom the charity aims to help. But the for-profit enterprise, with its well-paid employees and expense budgets, might actually spend more of our money helping its target market. In “Love is the Killer App.” Tim Sanders (chief solutions officer at Yahoo) argues that “everything a company does, from how its product is packaged to how it is positioned…define[s] the benefit to the user.”

A good company will spend close to 100 percent of its money either making a better product (so it can better compete and keep customers) or else expanding its customer base. If Reading Rainbow hires an engineer with the Kickstarter money, he’ll be paid to improve the customer’s experience. Even if it hires a highly paid executive, that decision will benefit its target market: Savvy companies don’t pay executives (or any staff) more than the value that they generate. Every decision the for-profit enterprise makes is designed to add value for its customers, because that’s the only way to survive and grow. A donation to Reading Rainbow may do more to foster a love of reading than a donation to its hypothetical non-profit cousin, because the for-profit Reading Rainbow has a monetary imperative to keep adding value.

Employee passion

Another reason we donate to philanthropies but not companies might be that many non-profits are staffed by true believers who live and breathe their cause. We assume that this enables them to create maximum value for their market.

But for-profit enterprises are just as relentlessly focused on the same thing, though in different terms. They focus on the bottom line. Even socially conscious businesses like Whole Foods aim to maximize profits: as CEO John Mackey argues, “A certain amount of corporate philanthropy is simply good business."

To maximize the bottom line, businesses have to be always creating value by serving others. That engineer Reading Rainbow hires may or may not be dedicated to increasing children’s love of reading. But his boss cares about keeping subscribers, and the only way to do that is to give those subscribers something they want: a better user experience, for instance, or more online books. That means the engineer has to work hard to make a better app, to increase children’s love of reading; otherwise the value-seeking boss will find someone else who will.

But the blurring goes deeper. As Mackey argues in another piece,

“A wall exists between the non-profits and the for-profits consisting partly of the stereotypes that exist in our society today. Non-profits are viewed as good because they have altruistic, idealistic goals. [...] [N]on-profits often believe that money “grows on trees,” and because their ideals are altruistic, they are seen as “angels.” Non-profits sponsor idealistic events like AIDS walks and they have an environmental consciousness. On the other side of the wall you will see the clear contrast with the for-profit sector of business. You see the stereotype of the greedy businessman with dollar signs in his eyes, grasping after money, and smokestacks popping up all around the world. The angel is transformed into a devil because again, the only goal is to maximize profits and that is seen as simply selfish and greedy.”

But these stereotypes are inaccurate. Non-profits can be greedy or self-serving, and for-profits can make the world a better place. Recognizing the good that both entities can do will serve us better than indulging black-and-white fallacies.

For-profit enterprises care about serving their markets as much as or more than most charities. Their livelihood depends on it.

Who pays?

The final reason we donate to charities rather than companies has to do with who pays the bills. Charities are not paid by those they serve. The Red Cross doesn’t only give its services to those who pay up beforehand. By contrast, companies only serve (directly, at least) the ones who pay. Reading Rainbow will offer some free educational offerings to poor schools, but it plans to charge other schools, as well as individual subscribers, for its services.

When someone benefits from a charity, they may or may not pay for what they receive. They may or may not see it as valuable enough to part with their hard-earned money. They might not even have any hard-earned money to begin with. As such, charities can help a lot of people who don’t necessarily derive optimum value from their service. Reading Rainbow, as a hypothetical not-for-profit endeavor, could give its free software to some schools and some parents who only want it because it’s free.

But the for-profit Reading Rainbow, by charging schools and parents ($9.99 per month for an individual subscription), only gives its services to those who see enough value in that service to cut a check. The only schools who sign up will be the ones who are likely to get the most value from it. The only parents who buy a subscription will be the ones who want to foster love of reading in their children more than they want a latte every two weeks. And these are the people upon whom Reading Rainbow will focus its entire effort. Like any good company, it will improve its services. And it will do so with a mind to pleasing those people who truly want them. Those people are the core of Burton’s market, and his economic survival depends on keeping them happy.

Now, some parents who badly want Reading Rainbow may flat-out not have the money to buy it. That’s a shame. But that downside is made up for by the prospect that more of Reading Rainbow’s efforts will go to satisfying people who self-identify as seeing real value in the service. And who knows? Maybe a charity will buy the Reading Rainbow product and offer it to schools who can’t afford it.

Conclusion

Kickstarter, which offers contributors "perks," has more in common with for-profit exchanges than with non-profit donations. But I would like to make a broader point than just defending Burton’s decision to engage in crowdsourcing: I’d like to argue that there is nothing wrong with donating to a for-profit enterprise.

I’m not suggesting that we all start donating to every company. I won’t be handing over free money to Apple anytime soon. But when we consider which organizations to donate to, we should focus on the essentials: Do they have a worthy mission? Do they help people we think deserve that help? Are they effective at doing so?

Reading Rainbow’s goal is to “change the lives of millions of children.” I consider that a laudable mission. A for-profit company is just as able to fulfill that mission as any charity and is just as worthy of my gifts.

ABOUT

JULIAN ADORNEY

Julian Adorney is an economic historian, entrepreneur, and fiction writer. He writes for the Ludwig von Mises Institute and other websites. You can find his collected work at adorney.liberty.me.

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