Lean Nonprofit: Introduction to Unit Economics
Lean is a methodology to develop, test and grow business models. Lean organizations build innovative, scalable businesses without taking a lot of risk.
Many people are familiar with corporations and technology startups that have embraced lean methodologies, from Toyota to Dropbox. But the lean approach is not just for companies.
Rather than relying on grants and donations, lean nonprofits develop a business model to earn revenue. This earned revenue enables the organization to make a sustainable, scalable impact.
Business Models for Nonprofits
Organizations can earn revenue a variety of different ways. Since 2012, Notley and Philanthropitch have worked with dozens of nonprofits that generate revenue to make a sustainable impact.
Here are a few innovative business models generated by Philanthropitch finalists:
Black Fret is a nonprofit that supports Austin’s local musicians. Black Fret members pay annual dues to fund musician grants and get access to exclusive performances.
College Forward is a nonprofit that provides mentoring to help economically disadvantaged students graduate college. College Forward developed CoPilot on the Salesforce platform to give users easy access to student data. The organization sells CoPilot to other companies, nonprofits and educational institutions, bringing sustainability to its core mission.
Code2College equips girls, students of color and students from low-income backgrounds with technical and professional skills to prepare them for careers in STEM. Code2College generates revenue when these students are placed as interns at corporate partners.
Understanding Unit Economics
“Nonprofit is a tax strategy, not a business goal. It’s okay for nonprofits to generate a profit!”
Matt McDonnell, Co-Founder and Managing Partner at Notley Ventures
The first step in developing an earned revenue model is to calculate your organization’s unit economics.
Unit economics is a way to look at the revenues and costs associated with your organization's business model. This makes it possible to project how profitable your model is today – and how profitable it will be in the future.
To calculate your unit economics, start by calculating your revenue per unit. To do this, divide revenue by units sold.
The next step is to list all of the expenses related to delivering your product or service. Generally expenses are divided into three categories:
Cost of Goods Sold (COGS): The costs to produce and distribute products
Sales, General and Administrative (SG&A): The costs to sell and deliver products and manage the organization
Operational Expenses (OpEx): The costs of running the day-to-day operations of the organization
We have built a simple template you can use to model your unit economics and create a 12 month pro forma. Enter your units, revenue and expenses in the model to calculate your gross margin and net profit per unit.
To use this template, save a copy to your Google Drive or download and save to use in Excel or Numbers. Read the Directions tab for how to complete the template.
More Resources for Lean Nonprofits
Notley’s Learn Nonprofit Workshop is designed for nonprofits that are exploring earned revenue models to make a sustainable, scalable impact. At the workshop, Notley Managing Partner Matt McDonnell helps nonprofits model their unit economics and create a plan to grow their revenues.
Can we help you scale your impact?
Applications are open for Philanthropitch 2019 in Austin, Texas. Notley offers workshops and resources for nonprofits through Notley EDU. To stay up to date on these initiatives, sign up for our newsletter.
We also consult with nonprofits to help them develop earned revenue models. Interested? Get in touch!