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StrategyApr 12, 2018

How to Decide: Give Charity Away for Free or Charge a Low Payment?

Allison De La Torre

As the nonprofit sector continues to grow and individuals continue to increase their charitable giving, the business challenges facing nonprofits deserve more of our attention.

Did you know?

  • More than 1.5 million nonprofit organizations are registered in the U.S., which is roughly one for every 200 people.

  • The state with the second-highest total number of nonprofits (as of the NCCS’s latest publication in 2013) is home to two of Credera’s offices: Texas.

  • The amount of U.S. dollars spent on charitable giving has increased every year since 1976, with the exception of only three years (1987, 2008, and 2009).

Credera often focuses on strategies for corporations and consults on how to drive profit, but nonprofits also face a multitude of business challenges, such as fundraising, budgeting, and volunteer retention, to name a few. In contrast to nonprofits who charge a fair market price for their goods or services (e.g., Girl Scouts, MPI Foundation, ACT, etc.), charitable nonprofits who give to the needy must tackle another more fundamental challenge first: “Should we require a low payment from those we’re serving, or should we give away our product or service for free?”

In order to answer this question, I interviewed two organizations with proven success: Dallas Area Habitat for Humanity, a local chapter of the international housing ministry that uses the ‘low payment’ model, and Grace Bible Church, an evangelical church in College Station, Texas, that employs both pricing models for different ministries.

dallas area habitat for humanity: homes as a ‘hand up’

There is a myth that Habitat for Humanity builds and gives away homes for free. On the contrary, in addition to affordable mortgages, Habitat requires 200-250 hours of ‘sweat equity’ spent working on the construction of the house, as well as completion of financial literacy classes and other ‘quality of life’ classes to build sustainable communities. To learn more about how Habitat originally chose the low payment model, I interviewed Blaine Cowart, manager of Homeowner Services. The reason summed up in one word? Empowerment.

Habitat’s founders Millard and Linda Fuller had a vision of ‘partnership housing’: allowing families to partner with the organization to make a tangible investment (not necessarily monetary) and achieve affordable housing. Blaine explained it like this:

“It’s a hand up, not a hand out. It has always been about empowering individuals, not giving away charity. And time is a precious resource that is a huge upfront investment!”

The low payment model has worked extremely well for Habitat and has barely changed since its inception in 1970s. The Dallas chapter boasts a 95% success rate of non-foreclosure, a statistic far above that of banks providing traditional mortgage loans. Blaine credited this success to the required time homeowners spend in their educational classes. Habitat has matched the long-term responsibility of owning a home to the upfront payment of time and money, avoiding free giveaways and truly empowering generations to come.

grace bible church’s ‘christmas co-op’: gifts parents can give

Another organization, Grace Bible Church, finds success with two contrasting ministries, as explained to me by Ryan Poehl, the Christmas Co-Op coordinator. For their annual Christmas Co-Op event, church families donate new toys and clothes every December to low-income families in the community, who ‘pay’ an hour of volunteer time at the co-op store before shopping the 70-80% discounted prices.

Interestingly, Ryan used the same word as Blaine from Habitat when describing the Co-Op’s reason for this low payment model: empowerment. Originally families in their congregations simply fulfilled Christmas wish lists, but recipients evidently felt helpless and embarrassed when car-fulls of gifts were delivered to their homes. So his team’s approach completely changed four years ago when they read two books: Toxic Charity about co-op initiatives, and When Helping Hurts about hand-outs doing more harm than good. They found that the key for empowerment is building healthy relationships over time, and charging a low price would better serve both their recipients and volunteers.

The shoppers at the Co-Op typically don’t have disposable income for Christmas gifts, but they are still working adults. They have commented on how much they appreciate the opportunity to volunteer because it maintains their sense of payment and ownership of the gifts for their children. In addition, similar to at Habitat, shoppers work alongside church volunteers, creating a partnership. In the church’s view, not requiring any payment of time or money would rob both parties of relationships and empowerment.

grace bible church’s ‘the big giveaway’: furniture for free

In contrast, the Big Giveaway successfully uses the free giving model. Each semester at Texas A&M University, church volunteers donate furniture, bicycles, and household goods. One Saturday, international students line up to enjoy a ‘Welcome to Texas’/Aggie tailgate and choose a desk, living room set, dining set, and bedroom set. Volunteers then deliver the items to the students’ apartments—all for free. Finally, the church maintains a focus on relationships by pairing every student with an American family to have a meal in their home.

Why not sell the items for discounted prices? Ryan explained that most international students are ‘situationally poor,’ meaning they temporarily gave up resources in their home countries and arrived in America with just a suitcase or two. They also will likely return home again after college. In this case, the goal of the ministry shifts from long-term empowerment to immediate relief for these students. The systemic issues of ‘toxic charity’ do not apply in the same way.

Ryan compared it to a food pantry, which also typically uses the free model to relieve immediate hunger. If you were to start a new food pantry and require people to pay, they would go to the next free food bank nearby since hunger is an immediate need, decreasing your effectiveness. Long-term development has its place, but short-term relief also has its place. Still, both are aimed at helping others, so neither is necessarily superior to the other. How do you choose a pricing model for your own nonprofit?

considerations for your organization

Choosing your pricing model, low payment or free, is a fundamental decision for any charitable nonprofit. Your model should be based on more than just your desire to give to others. Applying the insights gleaned from the above successful ministries, consider the following five factors when choosing how your own nonprofit will give:

  • Your Purpose:

    • Are you targeting to provide immediate relief (suiting the free model) or systemic development (matching the low payment model)?

    • Are you aiming to see quick, short-term results or slower, long-term results?

    • Is your goal to give back charitably (for free) or to build relationships and provide a ‘hand up’ (with a low payment)?

  • Recipients:

    • Are the people you’re serving not able to pay, unwilling to pay, or unwilling to work?

    • Or would they want to be included in the experience of empowerment and the community rebuilding itself?

    • Are they situationally or systemically poor?

  • Volunteers/Staff:

    • If you were to give away the product or service for free, are there enough people in your area who will supply donations?

  • Market:

    • Do you have ‘competitor’ organizations who are already giving in the same way?

    • How has your product or service historically been given?

    • Will a deviation from that model cause your recipients or volunteers to go elsewhere?

  • Scalability:

    • Will you rely on income to expand (requiring a low payment), or is growth likely to come purely from donations (which can be used to give away the goods or services for free)?

These are just some of the factors in play when considering which pricing model makes the most sense for your organization. I hope my learnings from two successful organizations and their ministries serve as a helpful guide.

If you would like further guidance for structuring your nonprofit’s giving model, send a note to findoutmore@credera.com or reach out to me directly at adelatorre@credera.com. Credera would be happy to partner with you to find the most effective and empowering plans to accomplish your mission. For further reading, check out Credera co-founder Matt Levy’s book, The Business of Faith, and the chapter on generosity.