Last week’s entry focused on pricing products and services in a for-profit business. While often overlooked, pricing drives nonprofit revenue as well.
If your pricing is too low, it can lead to all sorts of financial stress, including not being able to properly fund mission-driven initiatives, reward staff, or even to continue operations.
As in a for-profit business, pricing principles apply in the nonprofit world.
Cost
1) Cost is a valid consideration, but it should not be the primary driver of price.
Don’t multiply or divide your cost by a factor to arrive at your price. While a formula seems attractive in its simplicity, it almost certainly will not maximize long-term revenues.
Competition
2) Price competition is probably even less important in nonprofits than in the for-profit world. Most nonprofits offer rather unique services, so buyers can’t often substitute a lower-priced product down the street. However, the concern becomes “pricing oneself out of the market.” While it’s difficult to pinpoint the upper level of the market, it’s a useful exercise to ask, “Would demand fall off a cliff if prices increased by 5%?”
Psychology
Psychological pricing works with theater tickets as well as widgets, so $14.99 seems more attractive than $15.00.
Price-Point merchandising is well-accepted in pricing in the performing arts. After all, a front row seat doesn’t cost the show producer any more than a seat in the back of the balcony. Yet, it’s easy to “step up” a patron to a higher-priced ticket.
While my previous entry focused on profitability as the basis for price optimization, the motivation in a nonprofit is likely different. For example, maximizing revenues can allow an organization to increase its mission-driven functions, pay its staff competitively, and add to reserves — all worthy goals. One thing is clear — pricing drives nonprofit revenue.
Could your nonprofit benefit from a free, no-obligation pricing review? To take the first step to maximize your revenues, contact Counterpart CFO for an expert review and action plan.