At Our Fundraising Search, we work with a lot of clients that are great fundraisers. In fact, if you have taken our course “Thirty Asks in Thirty Days,” you cannot help but be a better fundraiser. Yet, even organizations with the best fundraisers can still find themselves with a revenue shortfall. Sometimes it is a question of bad luck; but more often, it is a result of poor revenue management and budgeting practices.
Over the last few weeks, I’ve been digging into a client’s revenue data and discovered that, prior to the pandemic, they were heading towards a revenue shortfall. Despite having a team of great marketers and fundraisers, they missed the approaching deficit. Now, like many of our clients, they are realizing that they not only need to rethink their strategic plan because of the pandemic, but that they also need to look for the revenue opportunities that the pandemic presents.
The fact that this client did not recognize the approaching revenue problem is not unusual. Unfortunately, most nonprofits have never heard of “revenue management” and fewer practice it. Revenue management is a science. It requires the disciplined application of analytics that predict the behavior of consumers – or donors – at “micro-market” levels. These analytics are used to make decisions that optimize product availability and price to maximize revenue growth.
In the for-profit world, the primary aim of revenue management is to sell the right product to the right customer at the right time for the right price. In order to do that, the discipline requires us to understand the customers’ perception of a product’s value and then accurately align the product’s prices, placement and availability with each customer segment.
I can already feel my nonprofit colleagues’ eyes glaze over with boredom. That is the problem. Let me explain in real world terms how this works in the for-profit world and then translate that to nonprofit.
Did you ever wonder why airline fares were so difficult to navigate? It’s because airlines engage in real-time, dynamic pricing in order to maximize revenue. Airline seats are a highly perishable commodity. Once the airplane has departed, you lose the ability to sell that seat.
As a rule of thumb, the farther in the future the seat booking is, the lower the price is. And, as you get closer to the departure date the higher the price goes. There are two reasons for this. First, setting the prices low for flights far in the future when you have the greatest inventory of seats rewards your customers for making a purchase commitment early, which is something you want. Second, as you get closer to the departure date, the inventory becomes more constrained as demand simultaneously grows. Airlines raise the prices on the remaining seats because they can. Higher demand plus lower inventory allows a company to charge more. If you question this, consider what you were willing to pay for toilet paper before the pandemic versus during.
Now let’s translate that to nonprofit. For many years, I worked in the performing arts sector. Many performing arts organizations make the mistake of believing they are selling the art. Whether it is Beethoven, Puccini, Simon, or Lloyd-Webber, the art doesn’t need you to sell it. It sells itself. Instead, you are selling a seat. Just like at an airline, it is a highly perishable commodity. Once the house lights go down, you’ve lost the ability to sell the seat. So, arts organizations should use the airline model and set prices low early and high close in. Instead, many use the panic model and drop prices the closer they get to opening night. This trains the patron to buy late, and hurts revenue.
An organization with even a basic knowledge of revenue management knows not to do that.
So, what about nonprofits other than performing arts organizations? Well, first, just about every nonprofit we work with has some mix of earned and contributed revenue. Revenue management practices work with just about any earned revenue model. Second – and this is the shocker – revenue management practices also work in planning and managing contributed revenue.
I recently participated in a virtual conference in Atlanta attended by several hundred for-profit and nonprofit leaders. While more than half said they were optimistic about the future for their organizations, nearly everyone identified a similar problem: the pandemic has created a constrained revenue environment at a time when the demand for services (and cash) has peaked. At times like this, maximizing revenue opportunities is critical.
I plan to write two more blogs on this topic, exploring how nonprofits can benefit from applying revenue management discipline to both earned and contributed fundraising. For now, suffice to say that it is what differentiates truly successful nonprofits. The most successful organizations use these principles to help make their fundraisers successful.
In my next blog, I am going to discuss how nonprofits can implement revenue management practices in their earned revenue models.