Nonprofits care about pricing just as much as their for-profit counterparts. Since nonprofit organizations generally aim to serve as many customers as possible, their prices have to encourage growth. However, the urge to set low prices is balanced by the need to produce revenue to improve services. Here are nine pricing tips that simultaneously generate higher revenues and growth. Best of all, these tips emphasize the importance of better serving customers by offering pricing choices.
Adopt the right nonprofit pricing mindset.
Some customers value and are willing to pay more for a nonprofit’s services or products than others. It is okay—actually, it is necessary—to charge higher prices to some and use the extra revenue to subsidize others (via discounts). This perspective often creates controversy within an organization. It is important to discuss and gain consensus amongst key employees on this new pricing mindset to ensure a seamless execution of a revenue and growth strategy.
Stop marking up costs.
The most common mistake in pricing involves setting prices by marking up costs (“I need a 30 percent margin”). While easy to implement, these “cost-plus” prices bear absolutely no relation to the amount that consumers are willing to pay. As a result, mission funding opportunities are left on the table daily.
Set prices that capture value.
Manhattan street vendors understand the principle of value-based pricing. The moment that it looks like it will rain, they raise their umbrella prices. This hike has nothing to do with costs; instead, it’s all about capturing the increased value that customers place on a safe haven from rain. The right way to set prices involves capturing the value that customers place on a product by “thinking like a customer.” New York’s Metropolitan Museum of Art raised its recommended donation from $15 to $20 based on the value it offers customers. The price increase was in line with the admission price charged by the Museum of Modern Art (a next-best alternative). Plus, unlike most museums, the Met provides the benefit of not adding a surcharge for special exhibitions.
Create a value statement.
Every organization should have a value statement that clearly articulates why customers should purchase their product over rival next-best alternative offerings. Be specific in listing reasons; this is not a time to be modest. This statement will boost the confidence of your frontline so they can look customers squarely in the eye and say, “I know that you have options, but here are the reasons why you should buy our product.”
Understand that customers have different pricing needs.
Most organizations view pricing as a two-lever strategy: raise or lower prices. The key to developing a comprehensive pricing strategy involves embracing (and benefiting from) the fact that customers’ pricing needs differ in three primary ways: product valuations, product preferences, and pricing plans. Differential pricing, versioning, and pick-a-plan tactics serve these diverse needs.
Implement differential pricing.
A fundamental part of most nonprofits’ missions is to serve customers with lower incomes. After setting a value-based price, it is important to provide “back door” discounts to price sensitive customers. Example tactics include offering discounts via coupons, organization affiliations, off-peak times, and targeted outreach programs. Be creative, ask yourself, “What tactics can my organization use to identify and serve people who care about price?”
Offer product versions.
One of the easiest ways to enhance profits and better serve customers is to offer good, better, and best versions. So how can nonprofits offer different versions? Focus on what your customers value. The Metropolitan Museum of Art found that its customers value a relationship with the museum, for instance. As a result, it offers fifteen annual membership choices ranging from $60 to $20,000 (President’s Circle includes a private reception with the museum’s president). A key differentiator of each membership version is the relationship level with the museum. While admission is technically free (a donation is recommended), over 128,000 people chose to pay for a membership in 2009. What versions can capture the differing value that your constituency places on your organization’s products and services?
Provide pick-a-plan options.
Customers are often interested in a product or service but refrain from purchasing simply because the pricing plan does not work for them. Instead of making a donation in the future, some may prefer the opportunity to donate (and enjoy benefits) today if the pricing structure is right, for instance. Harvard University offers the option to reap benefits today by donating $25,000 or more and then receiving guaranteed annual annuity payments for life. What new pricing plan will activate your organization’s dormant customers?
Use pricing tactics to complete your customer puzzle.
Nonprofits should think of their potential customer base as a giant jigsaw puzzle. Each new pricing tactic adds another customer segment piece to the puzzle. Normal Nancys pay full price (value-based price), Immediate Gratification Gregs are attracted by annuity options (pricing plans), High-end Hannahs buy the top-of-the-line (versions), and Discount Davids are added by offering 50 percent off on Tuesday promotions (differential pricing). Starting with a value-based price, employing differential pricing, versioning, and pick-a-plan tactics adds the pricing related segments necessary to complete an organization’s potential customer puzzle. Offering pricing choices generates growth and increases profits.