In the past few years, IETM has actively commited to supporting performing arts organisations in their quest to become more sustainable. The arts and cultural sector is challenged by a variety of factors, including public funding cuts, increased competition for available funds, digitalisation, shifts in the way people approach and consume cultural products and services, fast demographic transitions, the increased need to expand audiences and deepen relationships with them.
These challenges are the reason why we started working a few years ago with business models of non-profit arts and cultural organisations all around Europe. In each country the situation of the sector is different, but when the business models topic is first tackled, a few misconceptions usually arise. Here are three of them.
1. Only businesses have business models.
The word ‘business’ seems to still be considered taboo by quite a lot of arts professionals, so many organisations react adversely to the idea of business models. They proclaim that they are not businesses, and therefore business rules should not be applied to their work.
However, all organisations have a business model. No matter if they are for-profit or non-profit, all of them need resources and to properly organise themselves, in order to deliver their missions. It might just happen that their business models have not been explicitly designed, but rather unconsciously copied from other organisations in the same sector.
2. Business models are only about money.
There are many definitions of business models, which sometimes makes it difficult to understand what we are actually talking about, but what most of these definitions have in common is the central role of value creation. And here lies the main difference with what people usually think about business models. It is not only about how your organisation makes money, but about how it creates value and organises itself around its value propositions.
Value is defined as ‘the regard that something is held to deserve; the importance, worth or usefulness of something’. Value can be money, but it can also be many other things. Value is what is important for you and your stakeholders. And for being able to create value, we need to understand the desires, needs, challenges and problems of those that we are trying to serve: audiences, community, employees, volunteers, customers, funders, sponsors, etc. Keep it in mind: Business models are not (only) about money, but about value.
3. As a non-profit organisation, we cannot make a profit.
We could say that non-profit organisations in the arts and culture sectors have been traditionally characterised by the following:
- They are driven by a mission and not by profit-making.
- They have difficulties generating a surplus from their core activities.
- They are dependent on public funding.
- They are undercapitalised, and if they have any reserves, these are usually very small.
These caracteristics are usually true, but what we need to understand is that a non-profit organisation is not a ‘for-loss’ organisation. From a financial and managerial point of view, there aren’t many differences between for-profit and non-profit organisations: both need resources to continue their activity. Non-profits cannot pay dividends, but they should aim to generate surplus, as this is what will allow them to develop and ultimately enable them to properly deliver their mission.
So what is a business model?
A business model is a vital concept determining the success of any organisation and not a complex formula relating to its profit-making mechanisms. A business model is just a story explaining who your audiences and customers are, what they value, and how you will be able to sustain the organisation in providing that value.
At its most basic, every business model has three components, which respond to a few simple questions:
- Which stakeholders do we serve? Which of their needs do we seek to address?
- What do our stakeholder groups value? How do we create that value for each one of them?
- How do we generate income, and attract other necessary resources, to be able to create value for our stakeholders in a sustained way?
Innovating business models
While most organisations usually approach business models by focusing their efforts on improving their revenue model, business model innovation is a system-level or holistic activity. This means that contrary to product or process innovation, it focuses on the organisation as a whole. And the best way to start looking at how to transform the business model of our organisations is by revisiting the needs of our audiences and other stakeholders, and how we are trying to address them.
Business model innovation doesn’t come out of the blue. It usually requires a structured process and the commitment of management. It is also a continous proactive process as business models are always temporary and need to constantly evolve and adapt to new situations. And obviously, failure is part of the equation.
José Rodríguez is Communications Director of Trans Europe Halles.
IETM has published a free toolkit To sell or not to sell? to clarify the concepts and definitions related to business models and the innovation process. The toolkit also proposes a business model canvas tailored to specific characteristics of arts and cultural organisations, and illustrates how some cultural organisations across Europe have successfully innovated their business models.