Grow financial sustainability with a fee-for-service model in your nonprofit
Thinking about setting up a fee-for-service model for your nonprofit? Here's a step-by-step guide to help you get started.
Charging some level or type of fee-for-service is trending as nonprofits face greater challenges with finding and maintaining reliable sources of sustainable revenue. There are many good training resources on setting up fee-for-service models, such as this booklet: "Understanding Fee-For-Service Model," published by Strengthening Nonprofits
1. Identify a market for your goods or services
Who will purchase the goods or services to be offered by your nonprofit? This requires a market analysis and a business plan.
Don't be put off by these business document requirements. Look at writing a business plan as an opportunity to research and "kick the tires" on your notion that a fee-for-service system may work for your organization. Do your homework and talk to other nonprofit groups who have experience in this arena.
Ask yourself: why do I think instituting "fee-for-services" is a good idea? Nonprofit leaders come to the realization that they have a heretofore unrecognized revenue stream in charging a fee (nominal, sliding scale or via third party payer charges) that could assist with financial sustainability. They have seen other like organizations successfully charging fees or see an opportunity for third-party payers to support some of the services already provided (or that could easily be provided) to their client base. Mental health counseling or workforce training are good examples of services for which there may be additional payees.
Start your market analysis there. Who are your potential payees? Can they afford a fee? How do you find them?
2. Know the rules
Make sure you're aware of and following all regulatory and professional standards, whether you are selling prepared food or offering training classes. Again, do your homework!
Also, be sure you are not prohibited from charging fees based upon existing funding restrictions or organizational policies. FYI: Keep your board involved and informed every step of the way.
3. Develop a sustainable fee structure
Fee-for-service nonprofits typically use one or more of the following types of fees:
- Mandatory: stated price for a product, service or admission to an event
- Voluntary: requested or suggested donation
- Membership: monthly or yearly payment in support of an organization
- Hybrid: some combination of fees
- Third party billing for qualified services ( as in private insurance)
- Third party assumption of payment as social investment (a foundation agrees to pay hourly rate for prevention-focused services)
A tip: start small and as straightforward as possible. Complex sliding fee scales, expensive billing processes and drawn out collection procedures can kill a very good idea.
4. Research all potentially applicable taxes
For nonprofits, income from fees must be applied directly to the mission. If your nonprofit earns too much money, you might be subject to Unrelated Business Income Tax.
This is a good time to talk to your nonprofit's attorney and get advice. Same with your CPA. Ask them to submit a report on everything you need to know and ensure that the board gets a copy. Remember: many nonprofits are not used to paying sales or other business taxes. This is an area you must diligently administrate or hire someone to do it for you.
5. Budget for all administrative and overhead costs
Fee-for-service nonprofits necessarily incur some overhead expense, whether that's purchasing wholesale goods for resale, paying rent or maintaining equipment. Make sure to keep those overhead costs to a manageable percentage, so that a significant amount of revenue remains dedicated to the mission.
This is another area regarding which your accounting firm can help. Ask them to assist you in calculating overhead (something nonprofits traditionally have a challenge with, whether they charge fees or they do not). Do you expect/hope to make a profit? That's good, because it will help sustain your organization, but talk with your accounting firm about what are standard margins for the type of services you provide and if your market can support those prices.
6. Define success in a particular marketplace — and know how to measure it
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.
Remember that paying clients are also called customers and deserve excellent customer service. One way to provide that service is to offer a digital customer service platform to fee-for-service consumers that provides information, Q&A's, how-to's and thank you/ complaint tools.
Community Tool Box: Developing a fee-for-services structure
Strengthening Nonprofits: Understanding fee-for-service models