What’s the Right Price for Nonprofit Mission?
Nonprofits are some of the most rewarding and inspiring places to work because they are purpose and mission driven. Described so eloquently in the recent report of the National Council of Nonprofits, Nonprofit Impact Matters, “Charitable nonprofits embody the best of America. They provide a way for people to work together for the common good, transforming shared beliefs and hopes into action. They give shape to our boldest dreams, highest ideals, and noblest causes.”
Nonprofit financial fantasy
Ironically, precisely because the work nonprofits do has such intrinsic value, both financial supporters and nonprofits themselves have unwittingly conjured a financial fantasy that uses their best qualities and characteristics against them. The nonprofit financial fantasy twists what are admirable qualities of altruism and civic devotion into a misguided expectation that the work of nonprofits and their staffs should be labors of love and self-sacrifice. Noble sounding, but disastrous as a business model. This thinking creates a financial paradigm that chronically under invests in nonprofits and their employees. The financial fantasy nonprofits and their donors have co-created leaves nonprofit work underpriced compared to its true cost and undervalued compared to its sustaining impact in our communities and economies.
Whether or not we like to think of them this way, the reality underlying the nonprofit business model is that organizations provide a product or service and someone pays for the product or service. Nonprofit products and services are often crucial to the well-being of our society – social change, advocacy, artistic expression, education, healthcare, increased employment opportunities, and progress towards racial equity. The payers range from grantors to government agencies to individual donors to corporations. We call the transaction charitable giving, but the reality is that an exchange takes place at the societal level. The product or service has a real financial cost and provides real value. The funding that is transferred to the nonprofit for providing that service or product is, in effect, the price. Unfortunately, nonprofits and their supporters alike frequently miss the mark on matching the price to the true value that nonprofits are creating.
The error of pricing nonprofit programs at cost
A foundational error perpetuated by both nonprofits and their financial supporters is to price nonprofit program work at its cost. Any basic business curriculum would denounce pricing a product or service at cost, unless using it purposefully as a loss leader to attract other business. No other business entity in the world could survive by pricing its products and services at cost on an ongoing basis.
Yet, a common way of valuing nonprofit services, campaigns, projects, and programs is to develop a line-item budget. In traditional nonprofit practice, presenting a line-item budget to a potential funder is the equivalent of pricing the work at cost. It reduces the value of the work and the important mission it represents to time and materials. The danger of representing a nonprofit financial story this way is that we too often do an incomplete job of capturing the true costs associated with the work. In her pivotal Nonprofit Quarterly article, Claire Knowlton outlines the dynamic, describing how “nonprofits fear they will not be selected for funding if they reveal how expensive it truly is to deliver their intervention, and as a result shy away from asking for full costs.”
When we budget by line item, we risk being too timid and resigning ourselves to include only those items we think are appealing or palatable to our funders. More often than not, the resulting line-item budget understates the true costs of running the program or service or campaign. Many organizations forget to (or choose not to) allocate the cost of essential administrative and fundraising infrastructure to their programs, leaving funding gaps at the core of an organization. If our organization is to survive at all using this pricing method, it must supplement each project with funds from general operating reserves, general support funds, or earned income (if such resources are even available).
Building a better line-item budget
Given the current realities of the philanthropic and government funding climate, we cannot hope that line-item budgets are going away anytime soon. Still, nonprofits can take action to improve the effectiveness and sustainability of a line-item budget. The most obvious way to make a line-item budget workable is to budget for a surplus. In the current funder/nonprofit ecosystem, this is still a difficult sell. It requires enlightened funders to provide us more money than the stated cost of the program or service we are providing. Sharing a compelling narrative about what the surplus will mean for the future success, stability, or growth of our nonprofit mission is one possible path to encourage a donor to fund a surplus.
A second way to display a future-focused financial story is to move the surplus above the bottom line. We tell a more explicit story about the future when we add line items that go beyond a time and materials mentality. Funding the future includes line items for various types of reserves (operating, opportunity, capital projects). Our budgets could contain line items for research and pilot projects. If we envision our nonprofit continuing to grow, it only makes sense that there must be forethought and financial planning for expansion. We could incorporate line items that incrementally accrue for the additional project management, infrastructure investment, and staffing needed when we launch new programs. To ensure our organization is around for the future, we have to reset our breakeven mindset. The future requires reserves and to create reserves we have to bring in more funding than we spend on present needs.
Deliverable-based budgets as a step towards pricing at value
We can take an even bolder approach to pricing our nonprofit mission by foregoing a line-item budget altogether. This method of budgeting requires that we know the true cost of our programs and couple that with a willingness to price our work above that cost. Instead of providing a line-item budget, we have the option to present a deliverable-based budget. One that asks for an amount based on value (priced above cost) for which we agree to provide a certain mission-related deliverable or number of deliverables. The mission deliverables could take any number of forms – a service, product, outcome, event, or organizational change.
Presenting a request for funding tied to deliverables rather than cost transforms the financial and mission exchange between the funder and the nonprofit. Value is implicitly included in the price. The donor must decide if the price is justified by the value. The nonprofit must communicate the value (and produce it) to justify the price. It sounds foreign to nonprofit culture, but it makes explicit what is already at play. Potential contributors commonly compare nonprofits to each other when deciding which organizations to support. Nonprofits can take the lead in elevating the comparison to a question of value rather than a question of cost.
Communicating a price based on value
Gauging and communicating the value of nonprofit work is at the core of defining the measurable impacts of our work. The decades-long conversation about capturing and reporting the social, economic, political, and human impacts of nonprofit programs makes this a heady topic. One place to start is these evaluation and measurement resources from the National Council of Nonprofits.
Though communicating value is a difficult task, nonprofits need not shy away from claiming value above cost and putting a fair price on that value – a price that goes beyond breakeven. While it may be difficult to put a price on creating housing stability, providing meaningful employment, restoring healthy ecosystems, and facilitating harmonious communities, we cannot sustain any of these efforts if we allow them to be undervalued and underpriced. Pricing nonprofit mission and program work appropriately requires a change in mindset by both nonprofits and their supporters.
Curtis Klotz is a CPA serving as director of nonprofit innovation at CLA. His writing is inspired by his work in CLA’s nonprofit consulting and business operations practice and more than 30 years of industry experience. Before joining CLA, Curtis was vice president of finance and CFO at Propel Nonprofits, where he was a frequent online contributor to Nonprofit Quarterly and other blogs. He was named Minneapolis/St. Paul Business Journal’s Nonprofit CFO of the Year in 2017, and is past chairperson of the Montana Nonprofit Association. Curtis graduated summa cum laude from St. Olaf College with majors in women’s studies and religion.
Thank you for the very cogent analysis of line item budget presentations. Your description of the true cost and worth of not for profit organizations was spot on.