Last week’s entry focused on pricing of goods and services in a for-profit business. Contrary to popular opinion, pricing is every bit as important in a nonprofit organization; however, in nonprofits, it may be even more neglected.
Just as in a for-profit business, pricing — along with quantity — is one of the primary revenue drivers in a nonprofit organization. If the offered product or service is underpriced, 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.
The same principles of pricing apply in the nonprofit world.
1) Cost is a valid consideration, but it should not be the primary driver of price.
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, a useful exercise might be to ask, “Would demand fall off a cliff if prices increased by 5%?”
3) Psychological pricing works with theater tickets as well as widgets, so $14.99 seems more attractive than $15.00.
4) 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. It is clear, however, that just as in a for-profit business, nonprofit pricing decisions must be based on deliberate research and planning in order to be successful.
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.