Pinched by cutbacks in government funding, nonprofit organizations are entering the marketplace in more and more aggressive ways. That has prompted complaints from some businesspeople about the difficulties of competing with tax-free organizations. But it also has given birth to a new breed of consultants who help nonprofits develop profit centers.

Planned Parenthood Federation of America, for example, hired New York City-based New Ventures in early 1983, when Planned Parenthood decided to market a new product: a condom.

Normally, the federation's 190 affiliates offer contraceptives bought from brand-name manufacturers at wholesale prices, explains Sandra Grymes, director of special projects for the organization. Management saw a way to harness some of that revenue by selling its own trade-marked brand of products and turned to New Ventures's Edward Skloot and Cynthia Massarsky for help in drawing up a business plan for the product and developing a marketing campaign.

The condom was introduced in July 1983, and since then one million have been sold. Although Planned Parenthood has yet to make a profit on the product, its sales record has prompted management to begin plans for a full line of over-the-counter contraceptives.

Planned Parenthood is one of about 20 nonprofit organizations that have used New Ventures's services since its founding three years ago. Skloot started New Ventures -- itself a nonprofit enterprise funded by grants from, among others, New York City's Rockefeller Brothers Fund -- when the Reagan Administration budget cuts were just beginning to take hold, guessing that although nonprofits would soon be strapped by diminishing government subsidies, few would be aware of alternatives to public funds. He set up his firm solely to help nonprofits establish earned-inco-me projects to diversify and strengthen their revenue base.

The need for consultants in this area is so great that it has even spawned specializations within the field. Elliot Lang, founder of four-year-old Museum Quality Services Inc. in New York City and former senior vice-president of Saks Fifth Avenue, has concentrated his efforts on helping museums set up profit oriented retail marketing programs to feed their cash-starved institutions.

The very success of those ventures, however, has sparked an outcry for tightening the federal tax restrictions on them. In February, a group of industry associations organized the Business Coalition for Fair Competition to push for tax and legislative reforms that would "make competition between profits and nonprofits fair," according to coalition chairman Joseph O'Neil. He argues that the tax-exemption of the nonprofits' earned income gives these institutions marketplace advantages. O'Neil points out that formidable nonprofit research institutions can take business away from smaller, for-profit labs because their tax-exempt status makes it possible to under-price competitors.

The Internal Revenue Service has now given leeway to enterprising nonprofits by granting tax-free status to revenues related to a group's main mission. Planned Parenthood, for instance, won't be taxed on revenues from the sale of contraceptives, since its main focus is birth-control consultation and family planning. But some consultants encourage any profitable ventures, reasoning that it is worth paying taxes if the business is successful enough to keep the nonprofit center solvent.

Peter C. Brown, a Minneapolis/St. Paul-based consultant to nonprofits, advises his clients, "If you are in an area where you're competing with private enterprise, bite the bullet and pay taxes. Otherwise, you might end up in court, and it's just not worth the aggravation. If you're in a position where you have to pay taxes, then you're making money, and that's a happy problem."

Published on: May 1, 1984