Not-for-Profits have an Inherently Divided Focus
Although some charitable enterprises might best serve society by following a ‘not-for-profit’ organizational structure, it is undeniable that such organizations operate under a divided focus.
As a ‘not-for-profit’ business, a significant portion of the business’ efforts end up being devoted to soliciting, receiving, processing, and administering donations. This inevitably detracts from the ‘charitable’ efforts of the business.
Potential Danger: When Value Received is Less than the Cost Incurred
Although divided focus is an inherent drawback to the ‘not-for-profit’ business structure, an even bigger potential danger involves providing a good or service that the recipient values less than the business’ cost of providing the service.
Whenever two individuals participate in voluntary exchange, both parties are immediately better off, as long as no fraud or coercion is involved. As a result, society as a whole is incrementally better off immediately after the transaction has occurred. In other words, every voluntary exchange inherently leads to an overall betterment of society.
However, when a charitable business subsidizes the price of a good or service, they run the risk of entering into transactions wherein the value received is less than the cost incurred (same problem arises with government subsidies, but let’s defer that discussion). In this circumstance, society is actually worse off as a result of the transaction. It would have been better for the charitable business to simply gift the would-be cost of the good or service directly to the recipient.
For-Profit Charitable Organizations Can Experience Organic Growth
Charitable organizations are meant to better society by providing value to ‘consumers’ (the recipients of their goods or services). As alluded to above, if the value received is less than the cost incurred, the good or service should not be provided. By contrast, if the value received exceeds the cost incurred, then the recipient should be willing to compensate the business. The challenge arises when the recipient is not able to provide compensation requisite to the value he/she is receiving (i.e. the value received is the amount the recipient would be willing to pay for the good or service, if able).
The article below, published in Harvard Business Review, provides an example of how a micro-finance business was able to scale organically and thus serve far more people because the founder chose to operate the charitable enterprise as a for-profit business.
Be charitable by being profitable!
https://hbr.org/2008/06/business-basics-at-the-base-of-the-pyramid