by Michael Hurwich, President SPMG
Not all corporations have a mandate to generate profits for the benefit of shareholders. In both the U.S. and Canada, a number of corporations exist to serve the needs of “members“, with profits from activities flowing directly back into financing the programs of the organization. Do the pricing principles in these not-for-profit corporations differ from those in for-profit corporations? We think not.
Value based pricing applies as much to an incorporated golf and country club, or to an incorporated professional association, as to the proverbial widget manufacturer. But to successfully apply value based principles in a not-for-profit (NFP) setting, these corporations often need to change behaviors and learn new skills. In particular, NFP corporations need to find a way to make the transition from an exclusive focus on cost reduction and cost-plus revenue enhancement initiatives to true value based pricing. To thrive long-term, NFP corporations need to become masters at achieving value-creating growth. The value challenge becomes even more significant as NFP corporations enter diverse new businesses (such as facilities rentals, event management, or licensing programs) and revenue-generating portfolios grow increasingly complex. As shown below, pricing for value-based management is central to a total process that includes overall corporate strategies, goals, and objectives. One important element involves market segmentation towards an effort at value profiling.
In order to maximize the long-term value of a portfolio of customer relationships, the segmentation scheme will have to provide information that helps not-for-profit companies to:
· Identify and reward customers who currently create high value for the company
· Understand the potential to increase value by capturing a greater portion of non-customer business
· Understand the opportunity to acquire new customers from attractive segments which are currently under-penetrated by the company.
Pricing structures that incorporate one-time cost-reduction efforts, common among NFP organizations to spur improved operational profitability, will not build value over the long term. These “reduced prices” will quickly be copied by competitors, and market price structures will adjust accordingly. At some point cost control must give way to a focus on growth and pricing management in an effort towards optimizing the “right” revenue through value-based pricing.
Shifting to growth and value based pricing calls for new management techniques which stress disciplined yet flexible approaches to making value-creating decisions.
This involves:
· A sound conceptual framework for understanding how value is created over the long term
· An analytical model to pinpoint where value is being created across the various business units and customer segments
· A decision making process for evaluating discrete pricing decisions and resource allocation that is in tune with value based principles
· A value-oriented performance measurement approach to track sales and profitability against expectations
· A linking between value based pricing initiatives and employee compensation
Two fundamental principles can help decision-makers manage the changes required in both behavior and attitude as the NFP corporation embraces value based pricing:
1. Set value goals for the company as a whole and for each strategic business unit that are meaningful.
To make the goal-setting process meaningful, NFP organizations must set appropriate goals that offer three-to five year targets, not short-term commitments toward meeting budgets. Managing for value requires pricing for the long-term.
Unbundling a company for value based pricing initiatives into targets for individual business units is a critical first step in embracing value based pricing. It enables the establishment of different pricing initiatives for like products within different business unit offerings to compete against their respective competitors under varying market conditions.
2. Build a value based pricing process
Resource allocation, capital budgeting, and pricing management are the most critical elements of the overall value based pricing process. New opportunities to invest and price accordingly for nonprofit organizations must be placed on an equal footing with existing and competitive businesses for comparison purposes.
Traditionally, NFP companies were able to effectively communicate to their end users a price that was established by adding a given mark-up to the costs of the products – often coined “gold plating“. Profitability for not-for-profit corporations was assured from their invested capital, as end-users were conditioned to pay a slight premium for some value-added product or service.
Today, NFP corporations have achieved greater returns under value based pricing – first, by reference pricing to their competitors, and secondly, by defining what their customers value.
