Setting prices in many nonprofit organizations is a tricky proposition. Full costs, differential costs, or a variety of other configurations can be used to determine prices. The choice depends in large measure on the scenario under consideration. Unfortunately, many nonprofit managers give little thought to pricing policies. In fact, many tend to regard all marketing activity as something to be ignored. Such an attitude can result in their giving insufficient attention to client needs. It also can result in the organization pricing its services in a way that is unfair to some of its clients or developing pricing policies that inhibit the achievement of strategic goals. The purpose of this note is to address these issues, and discuss several matters that affect pricing decisions in nonprofit organizations.
IMPORTANCE OF APPROPRIATE PRICING
Pricing policies are important in most nonprofit organizations because prices (1) influence the behavior of clients, (2) provide a measure of output, and (3) influence the behavior of managers. The issues to consider differ somewhat in each of these areas.
The amount that a client (or third party on behalf of a client) pays for a service indicates that the service is worth at least that much to the client. Indeed, the better a pricing scheme fits with client decision-making options, the more powerful its impact on client behavior. For example, residents of a city or town can be charged for water usage in at least 3 different ways: (1) everyone can be charged the same amount; (2) everyone can be charged a monthly or quarterly flat-rate, based on the number of bathrooms and kitchens in their residences; or (3) everyone can be charged individually for the water they actually consume, as measured by a meter. In the first case, residents are not motivated to conserve water, and consumers who use little water subsidize those who use more. In the second case, the charge is somewhat more equitable because water usage tends to vary with the number of outlets. However, such a system does not motivate consumers to conserve water (although it may influence their decisions to add or delete bathrooms). If meters are installed, however, consumers are more likely to conserve water. Indeed, some years ago, the installation of meters in New York City led to a drop in consumption of nearly 50 percent.
Strength of Motivation. Prices that affect clients directly have the greatest influence on consumption. Normally, as the price per unit increases, clients consume fewer units. In some situations, however, price is a mere bookkeeping charge with no direct effect on client behavior. Some universities, for example, allocate computer resources by providing students and faculty with monetary allowances that entitle them to a certain amount of computer time. These allowances may be set so high or may be so easily supplemented,, that they do not motivate at all, and do little more than track computer usage. The motivating force of such systems would be much stronger if clients were allowed to trade “dollars” of computer time for other resources, or receive a refund for time not used.
Measure of Output
Measurements of output in nonmonetary terms, such as the number of visitors to a community health center or the number of hours faculty spend with students, are likely to be cruder than monetary measurements. If, for example, each service furnished by an organization is priced at its cost, total revenue for a period approximates the total amount of service provided during that period. Even if reported prices do not measure the real value of an organization's services to individual clients or society, the revenue-based approximation may provide useful information to managers. For example, if revenue in one year is lower than that of the previous year (after adjustments for inflation), managers have a good indication that the organization's real output has decreased.
If the quantity of service provided varies among an organization’s clients, a single price will not accurately measure the variations. At one time, for example, hospital patients were charged a flat rate per day, even though the services they received varied greatly based on their illnesses. Today hospital charges vary more directly with the quantity of services provided. Moreover, if the unit price of a service reflects the relative magnitude of that service, then total revenue is in effect a weighted measure of output, i.e., it incorporates differences in the services rendered.
Behavior of Managers
If services are sold, the responsibility center that sells them frequently becomes a “profit center.” In general . . .