Earned Income

It’s true that earned income is usually ticket sales or course enrollment income, or some other program generated revenue. Not much you can do about that – put ads in the weeklies, paper the local coffee shops. But as a development guru, you’ll start thinking of all the combinations that can make earned income build on itself. One of the classic manipulations of earned income is sometimes called the razor and blades strategy (a customer buys a razor at a higher one-time price and then continues to purchase the blade attachments over time at a lower price, hoping to amortize some of that larger initial investment). In arts organizations, this is often how memberships work: you pay, for instance, a $60 annual membership fee, you receive a discount or free entry to all that year’s events.

Other classic strategies include, two-for-one discounts, pricing partnerships with complementary organizations or businesses, and timed pricing (such as matinees or free Tuesdays).

Think how your organization can benefit from different pricing strategies. How can you attract a broader audience with pricing? How can you develop a more loyal following? How can you inspire audience members who enjoy one of your organization’s activities to try a different one? For more information on Pricing Strategies see Marketing.

Earned Income and Social Entrepreneurship
If you hang around nonprofit gurus long enough you will start to hear about “Social Entrepreneurship” (SE). Your organization may one day seek to develop a business model that goes a step beyond simple earned income. Roughly, SE is the process of creating an income generating entity that, through innovative practices, is self-sustaining and supports your core mission.

Resources:

  1. Explanation of terms: “Toward a better understanding of social entrepreneurship: Some important distinctions” (.pdf)
  2. “Profit Making for Nonprofits and Social Enterprise Tool Kit” by Jim Masters (.doc)
  3. Chapter 1 of “Generating and Sustaining Nonprofit Earned Income” by Sharon M. Oster et al (.pdf)

Pricing

Price is the exchange value of your product in the market place. There are three methods to determine the price of a product:

  1. The cost-based method consists in determining the unit cost of a product, and adding a markup to set the price. Simple enough, but it fails to connect the price with the perceived value of your product.
  2. The competition-based method consists in setting your price according to the competition’s. Also simple, but it lets others decide how much a consumer is willing to pay for your product.
  3. The consumer based method consists in setting your price according to what consumers are willing to pay for your product. The most accurate pricing method, but the most complicated.
Better pricing
“To improve a company's pricing capability, managers should begin by focusing on the process, not on the outcome. The first question to ask is not, ‘What should the price be?’ but rather, ‘Have we addressed all the considerations that will determine the correct price?’” writes Harvard Professor Robert J. Dolan[1], who suggests several steps to better pricing:
  1. Assess value consumers place on your product - Customer value is the difference between what a customer gets and what he/she pays.
    • What a customer gets (Total customer value): represents the total value of the entire product, incorporating services, personnel, and image values that a buyer receives form your offer.
    • What a customer pays (Total customer cost): the total cost of the monetary, time, energy, psychological, and sometimes physical costs or risks associated with your offer, in which the customer invests by purchasing your product.
  2. Look for variations in the way consumers value your product
    Different customers may buy the same product for different reasons, and the same customer may buy the same product for different reasons at different times. For instance, some customers might be very committed to your show and would not miss it for the world, and other might see it as just another entertainment option, and will only come if you offer them an advantageous price. You need to understand why people come to see your show, and define how these reasons influence their perception of value attached to your product.
  3. Assess consumer price sensitivity
    Will you sell more products if you lower your price? Maybe, but not necessarily. You need to understand the relationship between variation in price and subsequent variation in quantity demanded.
  4. Monitor prices at the transaction level
    The face value of a ticket might not mean much if the show is constantly discounted. You need to determine the actual price at which your consumers buy your product, taking into account all discounts rebates and other promotional offers.
  5. Identify an optimal pricing structure
    Using all the information gathered in steps above, you will be able to define a price scale based on customer evaluations of your different product features.
[1] Robert J. Dolan – How Do You Know When the Price Is Right? Harvard Business Review Sep 1, 1995

 

UBIT

The following is from IRS Source:  http://www.irs.gov/charities/article/0,,id=96104,00.html

For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

  1. It is a trade or business,
  2. It is regularly carried on, and
  3. It is not substantially related to furthering the exempt purpose of the organization.

There are, however, a number of modifications, exclusions, and exceptions to the general definition of unrelated business income.

Links
The IRS describes the special rules regarding UBIT here: Unrelated Business Income Tax. For more information, download Publication 598, Tax on Unrelated Business Income of Exempt Organizations.