Answer these questions before adopting a fee-for-service model
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In the nonprofit community, the term "fee-for-service" is used to describe various models of earning income in exchange for products or services. A fee-for-service nonprofit uses its earnings to support its mission and prioritizes benefit to the community over profits. Your organization can grow financial sustainability with a fee-for-service model.
If you're considering adopting a fee-for-service model for your nonprofit, you're in good company. In the U.S. alone, nearly three quarters of nonprofit income comes from fees-for-services. To make sure fee-for-service is a good fit for your organization, draft a business plan to answer the following questions.
1. Is there market demand for the products or services you're planning to provide?
Who will purchase the goods or services to be offered by your nonprofit? This requires a market analysis and a business plan.
To remain a reliable source of income, a successful fee-for-service model must become — and remain — competitive. A market analysis should provide a clear sense of the ways your fee-for-service model will be competitive in the marketplace.
Also consider if the product or service is of a quality you want associated with your nonprofit and to whom your organization will sell the product or service. Will you be selling to regular donors, who could become annoyed at being asked to donate as well as buy goods? Or will you sell to the public market of nonprofits and charities? Can you really make money by selling a product that's likely available elsewhere? Why would people who have no relationship with your nonprofit buy your product or service?
2. Do you have a sustainable fee structure?
Fee structures for fee-for-service models typically fit into one of the following categories:
Mandatory
A mandatory fee is a predetermined, stated price for the products or services offered. To determine appropriate fees, ask these questions:
- Why do you need to charge for this particular product or service?
- How much does it cost to offer the product or service?
- What are your competitors charging for similar products or services?
- How much do you need to earn to cover your costs?
- Will you offer discounts or sliding scale fees?
- How will your target market react to the fees?
Voluntary
A voluntary or requested fee model requests, but doesn't require, a fee for a product or service. A "suggested donation" is an example of a voluntary fee.
Membership
A membership is a periodic fee — paid monthly or yearly, for example — in support of an organization.
Hybrid
A hybrid model is a combination of various fee structures. For example, an arts organization or public media company might ask supporters to pay an annual membership fee. In addition, they might ask for supplementary voluntary donations or require supporters to purchase tickets for a performance or exhibition.
3. Will you be able to meet professional and regulatory standards?
Fee-for-service organizations must be diligent about offering products and services in a manner that aligns with professional and regulatory standards. Make sure you're aware of and following all required standards, whether for offering counseling services paid for by a third-party reimbursement, via government or private insurers or offering tools sets to improve nonprofit operations.
This means that service providers, including employees and contractors, must maintain appropriate business and professional licenses. Fee-for-service organizations must also abide by all codes and regulations that govern for-profit businesses in the same field, such as health codes for food service and OSHA regulations for worker safety.
4. Are you comfortable with the tax implications?
A fee-for-service model can be especially effective when your product or service is aligned with your mission. This alignment is also important in maintaining nonprofit status as an income-generating organization. If your nonprofit's mission is out of sync with the services you offer — or you earn too much income from the services offered — you might be subject to Unrelated Business Income Tax (UBIT). This tax, in part, is meant to ensure that a nonprofit doesn't earn excessive income from its fee-for-service model and become a for-profit company.
To avoid UBIT, offer services that strictly align with your mission and apply the fees you earn to support that mission. If your primary purpose becomes commercial or even appears to be excessively commercial, UBIT could be assessed. In some circumstances, however, paying UBIT taxes on one portion of a nonprofit business — a museum café, for example, which generates income used by the museum but isn't directly involved with the fulfillment of the museum's mission — may still make more sense than not offering the service at all.
5. Can you cover the overhead and administrative costs?
Understand the costs to offer a product or service, including paying service providers and purchasing equipment or materials. Of course, it isn't enough to simply offer a marketable product or service. A fee-for-service model must also account for all the associated costs, including the costs of administration, overhead, regulation, payment collection and record keeping. These administrative costs, in addition to the costs of providing the product or service, will reduce the amount of revenue directed toward your nonprofit's mission.
It is important to remember to “bake in” overhead expense, whether that's purchasing wholesale goods for resale, paying rent or maintaining equipment, into your business plan. Make sure to keep those overhead costs to a manageable percentage, so that a significant amount of revenue remains dedicated to the mission.
Nonprofits that receive income both from fees for service and from grants and donations must be particularly strict and accurate in the separation of those income streams. Grant funds, particularly public ones, can't in most cases be applied to fee-for-service operations. Rather, they must be directly applied to non-income-generating services. You must also be prepared to demonstrate that you've delivered the product or service, typically through documents such as receipts issued to payors and vendors.
6. How will you measure success?
Is success defined as sustainability over a period of years? A percentage of income dedicated to mission? Remember also the importance of success in the marketplace — creating satisfied, loyal customers. However you define success, make sure your plan includes a strategy for measuring and reporting impact.
Customer satisfaction and payment are critical, although by no means the only markers of fee-for-service success. It's equally important to develop frameworks for assessing the quality and efficiency of delivery, and the percentage of income dedicated to providing products and services (as opposed to internal and overhead costs). Consider strategies for assessing, and, if necessary, improving the impact of your products or services on the community you serve.
Article updated April 6th, 2018.
References
Nonprofit Answer Guide: Can nonprofits charge a fee for services?
Community Tool Box: Developing a fee-for-services structure
IRS: Tax on unrelated business income of exempt organizations (2015)
Strengthening Nonprofits: Understanding fee-for-service models
