Nonprofits face a fundamental "business" challenge: they're nonprofits. Most of the 1.5 million US nonprofits don't support themselves through "competing" by creating and selling better products, services, or business models.  They fund-raise, get donations, and find grants.

The problem with the typical nonprofit business model is that it's based on dependence - many non-profits scavenge for funding every year from unpredictable grants, donations, and even bake sales.

More and more entrepreneurs are founding social businesses. Many of these organizations are actually for-profit companies with a socially-minded missions like Tom's which has donated a cumulative 60 million pairs of shoes worldwide since it was founded.

But if you're truly a nonprofit 501(c)(3) organization, can you really innovate?

The answer is yes - And in fact business model innovation has arrived in the nonprofit sphere.

The nonprofit Union & Fifth, is a leading online luxury resale clothing retailer. All inventory comes from donations from women with closets full of high end brand dresses, shoes, purses, and pretty much any other clothing items you can imagine. Even celebrities like Kelly Osborne and Lonnie Anderson have jumped on Union & Fifth's donation bandwagon.

It gets better: Anyone who donates clothing to Union & Fifth can choose any charity of their choice and 50% of all net proceeds from the sale of their clothing goes directly to their selected cause. It's a win-win-win business model - those who donate get a tax deduction while supporting what they care about; buyers get great deals while seeing how their purchase will make the world a better place; and Union & Fifth creates a sustainable business model that gives it more control than an annual fundraising drive.

Another innovative nonprofit business model comes from the Old Skool Café in San Francisco. The café delivers a 1940's jazz-themed dining experience that includes great food, music and service - all delivered by and in support of at-risk youth. What started as an experiment with pop-up "restaurants" at various locations willing to host weekend dinners turned into a full-fledged supper club.

Founded in 2005 as a formal 501(c)(3) nonprofit, the Old Skool Café employs at-risk youth between the ages of 16-22 who come from jail, foster care or situations of neglect. The secret sauce is that the café creates a supportive environment where its young workers gain new skills and become part of a supportive community. The tangible results speak for themselves: a recidivism rate of just 10% for its youth workers as compared to the national rate of 76% - all on top of a sustainable economic business model. The café has been so successful it's about to launch a grand re-opening in a wholly-owned building that will allow the organization to flourish for years to come.

And then there's the trendy Notes4Hope whose mission to bring people and live music together to raise funds and build awareness to treat and prevent breast cancer.  Notes4Hope basically organizes really cool concerts like Mat Kearney and Luce, selling tickets that are considered tax deductible donations for the concert-goers. Now that's a win-win.

On top of that, Note4Hope's mission isn't just to support breast cancer prevention, the organization wants to support the women going through it - so it's developing a retail "wellness kit" to help women going through cancer treatment. The kit is similar to the type of package hospitals give to new moms, but these gift bags include healthy products (without cancer-causing chemicals) like healing ointments and bath salts, natural lip balm, natural hand sanitizers, and of course a Notes4hope compilation music CD.

These are just three examples. Any nonprofit can reinvent itself and its business model.  Here are five strategies for doing it:

  1. Think like a business.  Assume your funding will dry up within the next year.  How would you self-fund your activities? Could you sell a product like Union & Fifth, or charge for a service like Old Skool Café?
  2. Redefine "customer."  In addition to those you serve, consider who could become a paying customer.  Who has money that would buy something you have to offer related to your world-changing mission? Union & Fifth ultimately serves other nonprofits by delivering funding to them, but they define "customer" as any consumer who wants to buy women's designer clothing.
  3. Package up offerings.  Think creatively about what you "sell," whether a product, service, event, or experience.  What could you do to add value to people's lives (that they would pay for)? Old Skool Café isn't just a cafe that sells food, it provides a "supper club" experience that rivals most restaurants. Notes4Hope doesn't just organize concerts, it sells Wellness Kits that also support its mission.
  4. Don't go it alone.  Innovation is about partnerships.  What are the for-profit companies that could provide you with resources or revenue in return for positive press or promotion from working with you? Union & Fifth partners with brand names like Eileen Fischer and Seychelles Footwear who donate overstock items or provide products to be sold through Union & Fifth's online store.
  5. Create a sustainable business model.  Measure your organization like a business. What percentage of revenue will come from revenue-generating activities, and how will this evolve over time?

In today's world, running a nonprofit doesn't mean eliminating profit from your thinking. Whatever you're doing to serve the world, you can likely do more of it, in a more predictably sustainable way, by innovating your business model.