The Efficiency Dilemma: Should Nonprofits Pursue a Revenue Strategy of Concentration or Diversification?

Why balancing your revenue streams might not be the key to nonprofit efficiency—and what the latest research says about choosing between concentration and diversification.

If you've ever been responsible for the strategic direction of a nonprofit organization, then you've likely asked yourself (perhaps more than once): does putting all your (revenue) eggs in one basket actually help your organization run more smoothly? Or should you spread your wings and diversify revenue streams? It’s the classic question every executive team, CFO, and CEO asks when it comes to revenue strategy, including in the nonprofit space.

Luckily, a recent study from researchers in the United States provides some valuable insight into this conundrum by using data from a well known global nonprofit, Habitat for Humanity. If you're the type of leader who argues that the solution for nonprofits is to "find a balance", then the results of this study might surprise you.

What’s the Big Deal?

We’ve all heard the advice: “Diversify your revenue streams!” It makes sense, right? Spreading your income across grants, individual donations, corporate sponsorships, bake sales (seriously, don’t sleep on bake sales), and whatever else, should, in theory, keep the lights on and the mission rolling. If one source dries up, you’ve got others to lean on, minimizing the risk of a sudden funding cliff. The study calls this the Modern Portfolio Theory (MPT) approach. (Although to be fair, I can't imagine a lot of nonprofit executives are running around right now talking about Modern Portfolio Theory.)

But here’s the kicker. The study found that while revenue diversification can indeed minimize financial risk, nonprofits that fully concentrate their revenue on a single source are also more efficient. Yes, you read that correctly. But for the sake of amplifying this important conclusion, I'll say it again: efficiency can be achieved by doing the exact opposite of "finding a balance".

Publishing their findings in the most recent edition of the Nonprofit and Voluntary Sector Quarterly, US-based researchers Dr. Jessica Berrett and Dr. Chiako Hung reveal what they describe as a U-shaped relationship between revenue concentration and organizational efficiency. What does this mean? Nonprofits are most efficient when they’re either fully concentrated or fully diversified. Those stuck in the middle, relying heavily on one or two dominant sources but dabbling in a few others, are the ones who struggle the most. That middle ground? Turns out, it’s efficiency quicksand.

In reading this, I was reminded of Henry Mintzberg's suggestion that strategic success involves focusing resources and efforts on a single or few key areas to achieve a competitive advantage, what is often presented by strategic planning consultants via the adage "don't put all your eggs in one basket - but make sure that you're not spreading them across too many baskets."

Data that Backs It Up

In the study, Berrett & Hung (2024) define efficiency as the ability of a nonprofit to maximize outputs while minimizing inputs. In simple terms, it’s about getting the most bang for your buck—using the least amount of resources (time, money, staff, etc.) to produce the greatest impact.

To measure this, the authors rely on a tool that calculates an efficiency score between 0 and 1. A score of 1 means the organization is perfectly efficient, meaning it's utilizing its resources in the best possible way to produce outputs (e.g., the delivery of a service or the development of a product). Organizations with lower scores are less efficient because they’re using more resources than necessary to achieve their goals.

The key takeaway is that nonprofits are considered efficient when they can stretch their resources to get the maximum benefit or output—whether that’s providing services, building houses, or achieving their mission. Efficiency, in this case, doesn’t just mean low costs, but smart use of inputs to maximize mission-related outputs.

To better understand what this looks like in practice, the study dug into financial data from over 700 different Habitat for Humanity affiliates between 2011 and 2016. The researchers found that organizations that had a highly concentrated revenue stream (e.g., one big source) avoided various "transaction costs"— a.k.a. all the headaches that come with juggling too many funders, proposals, contracts, and compliance requirements. Fewer funders? Fewer hoops to jump through. In fact, affiliates with concentrated revenue saw their efficiency scores shoot up by an impressive margin compared to their more diversified (but moderately so) peers.

On the flip side, affiliates with a fully diversified revenue base (spreading income equally across multiple sources) managed to reduce their risk of revenue volatility. Think of it as spreading your investments; when one income stream tanks, another is there to keep you afloat.

Takeaways for Nonprofit Leaders

So, what can we learn from this? Here are three actionable points for nonprofit leaders to consider:

1. Pick a side. If efficiency is your goal, don’t sit on the fence. Either go big with one dominant source of revenue (but make sure it’s rock-solid) or diversify across the board, ensuring that no one source is dominant. Being stuck in the middle only increases costs and headaches.

2. Stability is key. If you choose to concentrate, make sure your main revenue source is reliable. No one likes surprises (unless it's an unexpected major donation), and if that funding stream suddenly dries up, you could be in big trouble.

3. Related diversification is your friend. If you’re going to diversify, do it smartly. Stick to sources that require similar skills (like government grants and foundation funding), rather than those that require building new organizational competencies. That way, you’re not spreading your team too thin learning new tricks for every new source, plus you're also hopefully minimizing the additional transaction costs that often come with entirely new sources of revenue that rely on the implementation of new organizational competencies and systems.

The Bottom Line

Whether you’re a nonprofit manager, fundraiser, or CEO, the revenue strategy you choose can make or break your efficiency. So, pick a lane—go all-in on one funding source or spread the wealth—and stick with it. Oh, and if anyone tells you that the middle ground is the safest bet? Politely tell them that efficiency disagrees!

References

Berrett, J. L., & Hung, C. (2024). Does revenue concentration really bring organizational efficiency? Evidence from Habitat for Humanity. Nonprofit and Voluntary Sector Quarterly, 53(4), 974–996. https://doi.org/10.1177/08997640231199469

Mintzberg, H. (1987). The strategy concept I: Five Ps for strategy. California Management Review, 30(1), 11–24. https://doi.org/10.2307/41165263