Sustainability is a bit of a buzzword at the moment in the not-for-profit (NFP) sector, but what does it actually look like on a practical level? Let’s look at five common myths about pricing services in NFPs – myths that are hurting your sustainability. We’ll look at some strategies you can consider implementing to move to a place where you have a more profitable business and are less reliant on the whims of the government to provide grants and other funding.
Myth #1 – You should act like a charity
Just because your NFP is all about delivering on a social purpose, doesn’t mean you should be making a loss doing it. And it also doesn’t mean you have to do it all for free or cheap – although sometimes you might choose to (more on that later). Reposition yourself as a social enterprise. You’re a business with a social mission, so you need to earn money in order to achieve that mission in a sustainable way (and to continue to grow and develop the capability of the business). Stop feeling icky when you ask for money for your fantastic services (when it’s reasonable to expect your clients to make a contribution).
As a business, rather than a charity, you might also look at developing some different arms of your business. Sure you might have some heavily subsidised services that might be part of your core social mission but are there services or products you can provide on a commercial basis to improve the overall profitability of your business? What power would it give your organisation to have some income streams that weren’t tied to government grants or contracts, that instead gave you the freedom to decide how you re-invested the money in your organisation and, by extension, your community?
Myth #2 – Numbers aren’t that important, we’re all about our people
If you truly want to serve the interests of your people, you need to be sustainable. Get truly to grips with what each element of your NFP’s business is costing to deliver. A ‘gut feel’ of costs is not enough. Sit down with your bookkeeper and delve into the numbers. Not just materials, look at your staff costs and your overheads. Where are you making money? What services are a financial disaster? If you don’t truly know what it’s costing to deliver your business offerings, it will be super hard to know what areas of your business need tightening up.
Myth #3 – We’re not in it for profit, it’s ok if we lose a bit of money
Once you’ve figured out what your business is costing you to deliver, you may well have discovered (if you didn’t already know or suspect) that you are discounting some services below their cost price (and quite possibly discounting some below market price in other sectors). The issue with discounting, other than it directly costing you money by not charging at least the market price and/or the cost of the service, is the issue of the opportunity cost.
Let’s do some maths. You run a short activity. You work out that it costs $400 when you take into account staff time to plan, promote and run the activity plus the materials (which only cost a total of $50) and a portion of your business overheads. You have 15 kids attend the workshop and each pays $5. So whilst you brought in $75 in workshop fees, you actually ended up being out of pocket $325. You run these activities 24 times per year. Over the year, it’s going to cost you $7,800 to offer this service. Yikes.
Asides from the real cost, let’s think about the opportunity cost. An opportunity cost is the cost you incur when you miss out on doing something because you’ve chosen to do something else instead. Imagine that you took that $400 investment X 24 times, you’ve got $9,600 to spend on a project, service or some other opportunity to work on your social mission, and potentially generate a profit. What could be possible?
Myth #4 – If we charge full price, clients will be unhappy
There are lots of reasons that people discount. Here are some, potentially, good reasons to discount:
- To give clients a ‘taste’ of the service as part of a sales funnel that sees them convert to full-price purchasers; or
- Get sales from customers who have bought previously, but have been inactive; or
- Generate sales during a ‘quiet’ period.
Here are some reasons that not-for-profits sometimes discount, which might not be super useful for the organisation:
- You believe that people will not pay full price; or
- You are embarrassed to ask people to pay for a service; or
- You feel like you shouldn’t be charging a profitable price because of your not-for-profit status.
If you are going to discount, it should be part of a marketing strategy. If you are going to subsidise (so give a discount to a limited client group based on their ability to pay) be really clear about what they can afford (based on the value you’re offering them). If what you are offering is worthwhile and relevant, your client group should be willing to part with a payment that reflects the value you are giving them. Have a think about how and why you’re discounting/subsidising at the moment – is there a section of your client group that pays the lower price but still seems to have money to spend on other priorities in their life. If someone rocks up to your super cheap workshop on car maintenance for women with a snazzy new outfit or even carrying a coffee from the cafe, you’ve left money on the table that you could have leveraged for your organisation!
Also, consider that when it comes to subsidising you can consider alternative payment methods – for example, could you offer a barter option? Or a payment plan? If your offering is valuable, there is a good chance your potential client will be keen for a way to compensate you for the value you offer.
Myth #5 – We’re just a little organisation, we can’t expect people to pay full price
If you are carrying a bunch of ‘stuff’ about what your service is worth, you are going to have problems asking clients to pay what the services are worth. If you believe your clients aren’t able to afford your service (or they are telling you that), it’s probably time to review your approach to pricing and marketing.
Things for you to think about:
- What is the value of the service/product to the client? What difference will it make to them? Do you believe in the value you are offering?
- How have we explained what is on offer and what the value is for the client?
- Does the service/product meet the needs of your client?
- Does the client have a worry or a question about the service/product that you haven’t addressed?