Ch. 01.doc

CHAPTER ONE THE GROWTH AND DEVELOPMENT OF NONPROFIT MARKETING Key Points The purpose of the first chapter is to introduce students to the role of marketing as an effective management tool for nonprofit organizations. Marketing is a discipline aimed at influencing the behavior of others through the systematic use of strategic mindset, organizational processes, tools and technologies. Its application to the nonprofit sector is well accepted and has been steadily growing even as the sector itself has been growing faster than most sectors of business. Nonprofit marketing is not the same as for-profit marketing because the nature of the organizations involved are different. Nonprofits play unique and evolving roles in society. In response to increasing competition there continues to be growing commercialization and adoption of “business tactics ”while, at the same time, fund generation has expanded from traditional donations and government grants to merchandising and for-profit funding entities tied to the nonprofit. The application of marketing to a nonprofit necessitates how it relates to its environment in terms of its funding, its mission, its use of volunteers and other factors. Historically, nonprofits have been judged in large part with public scrutiny negative about marketing and marketing techniques while today the sector is evolving to one which is increasingly being judged by business standards. It is also important to understand the type of “marketing exchanges” a nonprofit’s activities entail. A few target customers pay economic costs familiar to business marketers, while large numbers of nonprofits delve more into the realm of human behavior to sacrifice old ideas of values, give up old patterns of behavior or time or energy, or adopt new and sometimes controversial attitudes and behaviors. In return, these nonprofit customers expect to receive a value for their contribution, whether that is good or services or social or psychological benefit to themselves or to society. Like their for-profit counterparts, nonprofits do influence exchanges of goods and services for money. However, the uniqueness of the nonprofit exchange is the focus on non-monetary exchanges in return for social and psychological benefits. To influence these exchanges, different perspectives and techniques are required, and greater understanding of ethics is necessitated. In fact, it is this greater application of marketing as an applied social science in nonprofit environments which sets marketing’s role in strategy, board integration and customer interaction at a level often not reached by their for-profit counterpart. Chapter Outline Marketing and the Nonprofit World The role of nonprofits in civil society Understanding myths about the nonprofit world Reasons for studying nonprofit marketing The history of nonprofit marketing Nonprofit marketing in the 21st Century and recent developments Creating understanding of the purpose of this book Evolution and Importance of Nonprofit Organizations Models of the four stages of nonprofit organizations Growth of and need for business management and marketing strategies in nonprofits Role of nonprofit organizations in the US and around the world Explanation of cross-Country differences in nonprofit growth, models and size Relationship within the “three sectors” – Nonprofit, Public and Commercial The Uniqueness of Nonprofit Marketing Classification and tax benefits of nonprofits Special Challenges of nonprofit marketing Variations within the Nonprofit Sector Categories and types of nonprofit organizations Functional differentiation of nonprofits based on volunteerism, competition funding and nature of the behavior influence Typology of behavioral and social challenges Ethical Challenges in the Nonprofit Sector Vignette: Politics and Wal-Mart This case examines the use of data-mining in political campaigns. Data-mining, long a mainstay marketing technique for major retailers like Wal-Mart and Target are now being used in political environments. These highly sophisticated marketing targeting techniques can radically improve the efficiency and effectiveness of political marketing. This technique allows the marketer to gather all the internal and external data they can gather and on potential target voters - past voting behaviors, hobbies, media habits – and find ways statistically to group them that tells the candidate whom to target and how to address them. This case illustrates the fact that nonprofit organizations are adopting complex technologies and marketing professionalism to attain their objectives. This case further debunks myths about nonprofits and government, that their use of volunteers makes them less professional and more “fly by the seat of the pants” than for-profit organizations. Chapter Summary The purpose of this chapter is to lay a foundation by establishing an understanding of role of nonprofit organizations in society and the role marketing plays when they are managed effectively. Nonprofit organizations are pervasive institutions affecting our lives and the world around us in numerous ways. Three theories justify why society needs nonprofit organizations: Public Goods Theory argues that they exist to provide services the government does not; Contract Failure Theory focuses on the concept that nonprofits can provide certain services that should not be in the commercial sector – such as day care; and, Subsidy Theory, which says that government directs what nonprofits offer through tax breaks and funding. The first section of this chapter also identifies a number of myths about nonprofits, and debunks the myths pointing out that the nonprofit sector is a large, growing, important, challenge sector that is relevant to our daily lives and to business and business people in ways that have not been appreciated. The nonprofit sector provides more than 8% of all jobs in society, more than 28% of all American adults volunteer in the nonprofit sector and the sector is anchored by a number of large nonprofit entities taking in more than $4 billion a year. Marketing is an effective and important tool for nonprofit organizations. It is a discipline aimed at influencing behavior as an applied social science, through the use of a strategic mindset and sets of identifiable organizational processes, tools and technologies. Although originally derived from business, nonprofit managers also need to use marketing in order to be successful in their fast growing and increasingly competitive sector. Marketing is needed to influence donors to give, volunteers to come forward, clients to seek help, staff to be courteous and friendly, board members to serve altruistically, and so forth. This also holds true for many parts of the public sector which in many ways function like a nonprofit. In addition, business managers who interact with the nonprofit world through activities like cause related marketing and volunteer work would benefit from understanding marketing’s applicability in the context of the nonprofit sector. The idea of applying marketing to nonprofit organizations was introduced in the late 1960’s and developed through the next decades. Its adoption was initially most rapid in organizational and exchange contexts similar to those in the private sector, such as education, healthcare, recreation, transportation, libraries and the arts. By the late 1980’s, it had extended into governmental agencies and organizations whose transactions where no products, services or money were used – such as prevention of child abuse or quitting smoking. The last decade of the twentieth century saw continued growth of the sector and an increase in the use of marketing – marked in large part by marketing subspecialties in publications and professional organizations for a variety of nonprofit industry categories, including healthcare, education, and government. By 2002 more than 240 universities were offering courses in nonprofit management. The 21st Century has seen this continued growth in several major and distinct arenas. Since the beginning of the century, the field has seen significant acceleration in the growth of social marketing - both in the U.S. and overseas. Secondly, since the late 1990’s, there has been growing attention paid to the international dimensions of nonprofit marketing. The third major change was the growth in importance of corporate involvement in nonprofit organizations through strategic partnerships, volunteerism and chances for executive growth. The concern for ethics, has also carried over to the nonprofit sector. Finally, in 2002, the American Marketing Association - the largest organization of marketers worldwide - began concentrating on and offering targeted conferences just for nonprofit organization marketers. Nonprofit marketing is not the same as for-profit marketing because the organizations involved have different natures. The role nonprofit organizations have in society can be characterized as evolving through four stages tied, in part, back to the theories cited at the beginning of the chapter: (1) a voluntary/civic model where citizens band together to provide services the government does not; (2) philanthropic patronage by the wealthy; (3) a rights and entitlements model where groups serving the public interest claim a share of public taxation funds, and : (4) the Competitive market stage where nonprofits must compete with each other in the marketplace of donor support. The authors contend that the next decade will see a return to philanthropic patronage because of huge corporate or individual gifts like those of Bill and Melinda Gates or Warren Buffett of Berkshire Hathaway. The difference, from the historical model is the likelihood that the patrons will want to see business practices , like those that made them wealthy, inculcated into the nonprofits where they invest their money and a greater likelihood of “hands on” involvement by patrons in those organizations to which they donate. Today, many nonprofit organizations have become extremely large and there is significant pressure for them to become more businesslike in their management as they manage revenues and assets measured in the billions of dollars. This growing pressure is perceived to take the form of: (1) scientific management based on best practice; (2) increased efficiency and war on waste, and (3) liberation management based on superior outcomes no matter how they are achieved. In response to critics of this more business like approach in nonprofits, a recent study in the Minneapolis/St. Paul area showed that the nonprofits had not adapted a “wholesale application of business and commercial practices” and that the acquisition of some more businesslike practices had become essential and experienced no detrimental organizational effects if they wisely adopted business like tactics or relied on more commercial income. The nonprofit sector is surprisingly large and has tended to grow faster than the private sector, and even more so internationally. In the last decade, nonprofits grew in number by more than 28%, and that public charities grew by more than 50% - reaching the point where, in 2006, there were more than an estimated 1.5 million nonprofits in the United States alone. Estimates by the Independent Sector of full-time, part-time and volunteer employment in nonprofit organizations found it to approximate in the neighborhood of 10% of all workers. Other research indicates that the global international civil society sector comprises a $1.3 trillion industry and equates to the 7th largest world economy. Sources of funding and levels of involvement vary by country and region with more support in Latin America being derived by fees, whereas the United States and Europe have more reliance on public sector support. Surprisingly, multinational or “cross-county” research has found a larger nonprofit sector to be associate with both a larger government role in provision of public services and a smaller funding role by private charity. This suggests that the sector is not competitive with government, but more cooperative or symbiotic with it in meeting needs in which there is strong social belief and support. This sector interdependency was borne out by higher levels of nonprofit funding by government and of nonprofit service provision in health and social services where government is already active. This data suggests that countries can be classified according to the regime or government focus on social spending on welfare and the scale of nonprofit activity – whether the country’s regime is ruled Statist, Liberal, Social Democratic or Corporatist. The nonprofit sector both competes and cooperates with the public and commercial sectors of society. It competes with commercial companies in areas like health services, artistic performances and – more recently – in higher education with the evolution of Schools like the University of Phoenix. On the other hand, it cooperates with businesses in activities like cause marketing and strategic partnerships. There are numerous examples of the three sectors cooperating to create economic development, respond to poverty and health needs and in disaster relief such as the 2004 Asian Tsunami and the Gulf Coast’s Hurricane Katrina in August of 2005. In the United States, nonprofit organizations can be distinguished from each other by their legal classification with respect to taxability or federal and/or state government benefits. Section 501 of the U.S. Internal Revenue Code grants tax-exempt status to 24 different categories of organizations, each category receiving different sets of benefits. These can include exemption from taxes, lower bulk postage rates, minimized charges for federal services, permission to issue tax-free bonds, tax free status for donor’s contributions and access to free media usage. Marketing in the nonprofit sector is viewed as more difficult than it is in the private sector according to Michael Roshschild and other authors because of eight key factors. First the single most important difference is the nature of the target audience - instead of just having “customers, ” nonprofits have additional target audiences in donors and volunteers whose motivations and interests are at sometimes at odds with each other, making it more difficult to develop strategies that satisfy everyone. Nonprofit marketing is also different because of the range of behaviors the marketer is seeking to influence – not just exchange behaviors. Very often nonprofit marketers have to focus on behaviors which are invisible – quiting smoking may extend the life expectancy of a person, but that “future health” is invisible to the person who is being asked to quit. Very often, customers are being asked to undertake behaviors where they are either indifferent about he issue or for which there are no clear personal benefits, such as changing behavior to reduce global warming. Sometimes the behavior shift being asked for is dramatic and substantial and very personal – making it more difficult. Because many of the behaviors to be “marketed” involve intangible social or psychological benefits, it is often difficult to communicate the offering. Of course, not all nonprofits are the same, and it is crucial for both observers and managers to recognize the basic differences. The National Taxonomy of Tax-exempt Entities-Core Codes categorizes nonprofits under 10 broad headings. In addition, nonprofits can be judged in other key ways: (1) the extent of use of volunteers; (2) the extent of for-profit competition; (3) Sources of funds, and; (3) the nature of the behavior the organization is trying to influence. By definition, marketing focuses on “exchange relationships.” In the nonprofit world, the exchange relationships can be reduced to four main types: (1) Economic costs; (2) Sacrifices of old ideas, values , or views of the world ; (3) Sacrifices of old patterns of behavior, such as starting to wear seatbelts or stopping smoking; (4) Sacrifices of time and energy, such as volunteering or giving blood. In return for these types of sacrifices, consumers in nonprofit enterprises receive benefits of three basic kinds: economic (both goods and services), social and psychological. The combinations of the types of “payment” or exchange and the benefits constitutes a matrix of cost and benefit. (Table 1-4, page 26). A final dimension that makes the nonprofit sector different comprises the ethical challenges it faces. Nonprofit managers face complex ethical challenges arising particularly from the fact that they use society’s resources and good will to meet society’s needs. Consequently, nonprofit organizations are held to higher standards than even those that the commercial and public sectors are expect ed to meet. Ethical issues permeate all aspects of nonprofit marketing and are discussed throughout the book. Teaching Suggestions 1. If focusing on the learning pyramid, it is better to assign chapter reading BEFORE lecture, in this first class, - if a reading assignment wasn’t given prior to starting class and depending on the length of the class, class time can be given to read sections of the first chapter in class. It is helpful to use slides (powerpoint or transparency), video or other visual support – even white board or chalk board to reinforce key points visually during lecture. Frequent class interaction with open ended questions reinforces learning as form of demonstration. For instance, it helps to begin the course by asking students to discuss why they are taking it what they hope to get out of it. Frequent discussion helps to illustrate key points – discussion of text points can lead to the next text point or key learning. Possible discussion points for this chapter include: Students can discuss the growth and importance of the nonprofit sector to the economy. Students can be asked why each of the myths discussed in the text exist, what experiences they have had with them and what their opinions are of the arguments debunking the myths. Students can discuss their own desires to work, or not work in the nonprofit sector after graduation – and what factors drive them to their preference. Attention can be given to the global dimension of nonprofit marketing. The issues of competition for funds, fundraising techniques and volunteerism are international in scope and consideration of how they play out in other contexts can shed light on how they play out locally and nationally. Students can identify issues, globally, nationally, and locally which are being addressed by nonprofits. They can discuss whether those issues would be handled better through the public or commercial sector, and also discuss what challenges occur in “marketing” behaviors related to those issues. Topics such as family planning, global warming, smoking, or other “issues” which have been in the news locally recently can be used as a catalyst for the discussion. Students can look at what defines an organization as a nonprofit, both from the IRS Code perspective and the Taxonomy of Tax Exempt Entities. They can debate whether or not nonprofits deserve the benefits described and why. Referring to the Cost/Benefit Matrix (Table 1-4, page 26) students can discuss the core marketing concept of exchange, and discuss the types of behaviors “exchanged” in the nonprofit sector. Peter Drucker says that nonprofit managers must be better than private sector managers. Is this true of nonprofit marketing managers? Students can debate whether nonprofits should be held to higher ethical standards because of public expectations and the need for goodwill. “Practice by doing” is difficult from a single class perspective, but in this class or in the first few classes, activities can be defined to force this issue throughout the semester, then discussed in future classes. These might include such things as: Partnering with the University’s “Service Learning” program(s) for volunteer work or academic credit to identify activities in which the students may engage as part of the class Establishing a “class project” as if the class was a nonprofit organization – identify an issue, such as cleaning up the campus, reducing smoking on campus, encouraging weight loss with students or other “behavioral” objective, and have the class work through to stage an event, “market it” and measure – before and after – the results of the effort. Assign a “homework assignment” to volunteer a given number of hours with a local nonprofit organization and then keep a diary of the experience – with entries tied to the subjects discussed in class. Diaries can be assigned as class projects for credit. Hold a class off campus at the site of a nonprofit – include a tour and a guest lecture by a nonprofit manager As a term project – select a nonprofit or multiple nonprofit organizations and either in groups or individually write a marketing plan which then would have to presented to that nonprofit’s board or management team. To get students to “teach others” – use frequent student presentations such as “marketing briefs”, topic reports, group work and group presentations, and volunteer or nonprofit activity experience reporting. Short Answer Questions Describe the key developments in nonprofit marketing at the beginning of the 21st century. Growth of social marketing to improve social welfare International dimension of nonprofit marketing Growth of nonprofit marketing publications, subspecialty organizations and communication Greater corporate involvement through cause related marketing, company volunteer programs and socially responsible employment and investment practices American Marketing Association recognition and conferences What are some of the myths about nonprofits? The sector is insignificant The sector is unique to the United States – not global Nonprofits are small, specializing in narrow domains Nonprofits are managed by “do gooders” – not professional managers Nonprofit organization challenges are mundane, and not very difficult compared to challenges faced by business People who work in nonprofits are underpaid – there is no opportunity for “big money” There’s no need for business to align itself or partner with nonprofits – those kind of community partnerships don’t have any impact on the bottom line and only serve as a drain on the business. Why do the text authors contend that the nonprofit sector is large, growing, important and challenging? Nonprofits comprise between 8 – 10% of the labor force Volunteering is a major activity – 28.8% volunteer The Nonprofit sector has been growing faster than any sector but technology Internationally, nonprofits are strong and growing at a dizzying pace The sector is populated with a number of very large, very sophisticated organizations – the top five nonprofits took in more than $4 billion each in 200t Major donations of folks like Bill Gates and Warren Buffet have raised the profile of the sector 4. What rationales are offered for the special benefits given to nonprofit organizations? Public goods rationale – services such as health care, education and research would not be provided without tax subsidies. Quality assurance rationale – tax exempt nonprofits assure the public quality service and protection from unscrupulous profit-seeking for inferior service What do consumers offer in exchange in order to receive a benefit from a nonprofit organization? Give up money or goods to a charity to buy a product or a service Give up old ideas, values or attitudes Give up old patterns of behavior/adopt new behaviors Give up time and energy In what ways does nonprofit marketing differ from for-profit marketing? Good secondary data about consumer behavior is not as readily available Consumers often indifferent about sacrifices they are asked to make Consumers are asked to shift attitudes or behaviors Difficult to modify the offering Benefits from a consumer sacrifice is not always evident Benefits often accrue to others, not the individual making the sacrifice Intangible social and psychological benefits difficult to portray or demonstrate in media Why is there a concern about ethics in the nonprofit field? Scams have occurred in the charity field Marketing for social issues (AIDS and Abortion) has forced marketers to consider whether their methods are appropriate and justifiable Market research probes subjects considered taboo to certain ethnic and religious cultures There is a greater concern in society in general about ethics (Sarbanes-Oxley) There have been high-profile ethical breaches in the nonprofit world, such as United Way Multiple Choice Questions According to Peter Drucker, nonprofits are becoming management leaders in the area of a. strategy b. effective use of boards of directors c. accountability d. leadership e. all of the above (Moderate; p.7) Which of the following could be an example of competition between the nonprofit and commercial sector? a. cause marketing b. museums selling merchandise in their gift shops and through catalogues (Easy; p.12) c. corporate volunteer programs d. social mutual funds based on corporate social performance e. strategic partnerships with corporations Which of the following is true? a. The main focus of nonprofit marketing is to influence beliefs and attitudes b. For-profit marketing and nonprofit marketing use different management techniques c. Nonprofit marketing and for-profit marketing differ in terms of their environments (Moderate; p 7) d. Nonprofits are run by do-gooders who have limited interest in efficient management and a dismissive attitude toward those who do e. Working in the nonprofit sector is a poor career move for those who want to make “big money” Which of the following is an invalid (false) statement about nonprofits? a. The revenues of the largest would put it in the Fortune 500 b. Their employees and volunteers comprise approximately 10% of the U.S. workforce c. Their managers earn less than equivalent for-profit organization managers d. Their missions and tasks are important but not as complex and hard as those of for-profit organizations (Moderate p 5) e. The nonprofit sector has been growing faster than most sectors of business (excepting technology) 5. The idea of studying how to apply marketing concepts and tools to nonprofit organizations was developed during which time frame? a. The late 1950’s and early 1960’s b. The late 1960’s and early 1970’s (Challenging, p 8) c. The mid 1970’s d. The late 1970’s and early 1980’s e. The late 1980’s Which large U.S. nonprofit has “gone international” – establishing major international operations? a. The Salvation Army b. Habitat for Humanity (Moderate; p 10) c. Komen Race for the Cure d. The Arthritis Foundation e. Easter Seals Which of the following countries has a larger nonprofit workforce than the United States? a. France b. Australia c. The Netherlands (Moderate; p 18) d. United Kingdom e. Israel Asking a consumer to wear a seat belt is an example of an exchange of: a. old behavior patterns (Challenging; p 26) (AACSB – Reflective Thinking) b. economic assets c. time and money d. values e. opinions 11