October 29, 2010 | Read Time: 3 minutes
When nonprofit groups set prices for their services, they are often encouraged to follow models set by businesses. But is this the best approach for all organizations?
Recent news articles on nonprofits and pricing—and conversations we have here at Nonprofit Finance Fund about our pricing structure—have brought home the point that pricing in the nonprofit world is actually much more nuanced than in the business world.
In a June Stanford Social Innovation Review blog, Rafi Mohammed, a consultant who works with businesses on pricing strategies, recently provided some guidance. Mr. Mohammed encouraged nonprofits to base their pricing on the value of the services they provide rather than on what it costs them to provide their services. He also encouraged them to incorporate differential pricing into their strategies — offering lower costs for clients who cannot afford higher prices.
A few weeks later, Kate Barr of the Nonprofits Assistance Fund wrote a post urging nonprofits to consider charging clients for services to help improve their finances and to build stronger relationships with their clients.
Both writers pointed out examples of nonprofits that employ these pricing strategies—universities, theaters, and museums.
In each instance, the customer or end-user pays for the service or product, whether it is a student paying tuition, a patron buying theater tickets, or a foundation sponsoring an exhibit. These nonprofits are able to set their prices primarily by the value they create and what the market will bear.
Ivy League universities understand this, as do the premier arts organizations. They charge a premium for their services. They are also able to offer differential pricing and tiered pricing, creating multiple price points to attract different customers. These strategies allow them to cover their overhead costs and have income that can be used to pay for future investment and growth.
I wondered how these pricing concepts would apply to nonprofits that primarily provide services to customers who aren’t the direct payers—groups such as homeless shelters, job-training organizations, and foster-care agencies.
Often the services that nonprofits provide for these in-need populations are paid for by a government entity, and as such the nonprofit typically doesn’t control the pricing for its service. The prices are typically set or negotiated directly or indirectly with a government agency that determines what it will pay for a service.
Most government agencies do not cover the cost of providing the service. They operate on a reimbursement basis and determine which expenses are eligible for reimbursement, or on a fee-for-service basis in which payment might be contingent on factors outside the nonprofit’s control.
In both instances, nonprofits are unable to use the approaches that are popular among arts groups and universities. And most of the government funders don’t take into account for-profit pricing concepts. In fact, many of these government agencies are working under the premise that paying what it costs the nonprofit to deliver the service isn’t necessary, overhead is not something worth paying for, and helping organizations build a financial cushion is not part of their responsibility.
In those cases, before those nonprofits can take advantage of for-profit pricing models, the would need to have discussions with government funders about paying full freight of providing services to communities.
