In the past, it was only for-profits in the private sector who would talk about improving and optimizing “earned income” and “revenue generated.” Nonprofits face the ongoing challenge of increasing their financial independence—without sacrificing their mission or reducing their credibility—but there has always been a certain stigma attached to “earning” money, as opposed to grants or donations. However, in recent years, the for-profit and social sectors have moved closer together: While businesses focus more on stakeholders and shared value, nonprofits are coming under increased pressure to create and strengthen their revenue opportunities. In the face of growing competition, professionalization around more transparency and accountability, and the “commodification” of social “markets,” earned income not only allows for more reliable and diversified revenue streams, but it ensures the continuity and sustainable growth which is crucial to mission support.
As a first step in moving from donations and grants toward more sustainable and recurring revenues, memberships are a great tool to strengthen loyalty among supporters and to increase earned income for sustainable recurring growth. There is already a shift to recurring revenues underway in the for-profit sector, and Gartner predicts that by 2023, 75 percent of organizations selling direct to consumers will offer subscription services. Recurring revenues can be more predictable, stable, and reliable than a business model based on one-time sales. For example, Apple‘s software and service offerings have come to be much more important for its business today than its device sales: In the fiscal year 2019, Apple’s services business posted gross margins of 63.7 percent, approaching double the 32.2 percent gross margin of the company’s product sector. And while it may seem that measuring a nonprofit against the tech giant is like comparing, well, apples and oranges, recurring revenue is one area where the social sector should definitely take note and improve.
Toward More Sustainable Recurring Revenues Through Memberships
Memberships are more complex than recurring donations in terms of how nonprofit income is managed. However, they also are a window of opportunity, even in more “abstract” organizations. Not only do member fees provide financial support in the long term, members receive special perks and additional engagement opportunities, and thanks to a closer information exchange, are more firmly within the organization’s grasp. Members receive regular communication on the value of the mission, and in return are more open to sharing personal details that deliver insights on their motivations and needs.
As memberships grow in popularity in the social space, it’s important to see the full spectrum of membership programs: from donation-based organizations with memberships to membership associations that define themselves by the benefits they deliver. A donation-based organization like Save the Children, for example, has members who are more focused on the overall mission, rather than expecting some direct private benefits in return. Whereas in an organization like the Louvre, what goes around must come back around: Most dollars invested by a member need to translate into personal benefits.
How to set up your program will vary depending on where your organization sits on the spectrum. However, in our direct work over the last years on earned income for nonprofits, we have seen three key areas where nonprofits anywhere on that spectrum can apply business insights to optimize recurring revenues:
1. Offer Three Packages
In designing membership packages to strengthen recurring revenues, differentiation enables members to self-select the best alternative when weighing price against value. Lower tiers act as a safety net for those who due to budgeting reasons need to move down a level: When a member’s financial situation or connection to your cause changes, they will not have to completely abandon your organization. Meanwhile, higher tiers allow you to grow with your members as they become more informed and enthusiastic about your mission.
Behavioral economics and packaging theory can help you get more out of the added value you provide, like taking into account that consumers (and members) can often be nudged to be more generous. For example, when presented with three options, most people will go for the middle, even if—when presented with two—they would have chosen the base package. Regardless of the actual financial commitment, the middle can feel like the safest choice: not too frugal, not too wasteful, but just right.
2. Identify the Right Benefits
Benefits and perks will vary from one membership type to another, but all should act as an incentive for individuals to join. The content you deliver needs to be in line with member attitudes: If you are a benefits-driven organization, your members are most concerned with how much they get in return, and packages can be easily differentiated by the mission you provide: For example, the San Francisco Opera gradually increases the amount and exclusivity of its content (via backstage tours, discounts, exclusive events) in line with the level of its membership tiers.
Alternatively, in a donation-driven organization, recipients usually are not the members themselves. Content needs to show contribution toward the organization’s greater good, such that “benefits” are much more abstract. Any behavioral insights need to be applied sensitively and discreetly: Even someone who donates the absolute minimum is a valuable supporter of your organization and should be made to feel that way. Pressuring people into donating more can backfire, and comparing against peers can seem like a lack of gratitude. Members don’t want to brag: Assigning high-paying members “Gold” status or giving any other form of social recognition based on payment could be viewed as tactless.
“Upselling” a mission-driven member is a delicate matter, but it’s not impossible. Simply communicating the benefits of each membership in more concrete terms can already nudge people in the right direction. For example, Aid for Africa clearly outlines the quantifiable impact of three donation tiers. Membership organizations can follow suit by highlighting each tier’s value through, e.g., the tons of plastic waste collected, number of school supplies bought, liters of clean water provided, etc. In addition, offering package tiers that add more members as opposed to benefits (e.g. as a gift to friends, family plans) can encourage members to spend more, and still deliver a true sense of fulfillment.
3. Determine the Right Price
Some people avoid memberships because they are intimidated by or cannot afford the associated fees, whereas others would be willing to pay more even if there is no offer available. When you create different membership levels, you cater to every willingness and ability to pay. A selection of low-, mid-, and high-priced options (in the consumer world known as “Good, Better, Best”) allows you to set “price anchors,” which means if a member does not already have a certain price point in mind, you can shape their perception of what is an acceptable payment. Those who have taken a taxi recently may have seen this effect in action. By suggesting three tip amounts to customers (20, 25, and 30 percent), taxi drivers in New York for example have increased their average tips from 10 to 22 percent.
Further successful examples are the so-called “endowment effect” and the “decoy effect,” in which we see a higher willingness to pay for services or products that customers already “own.” Present potential members with a pre-selected list of content at specific price points, and require them to remove benefits they do not wish to pay for: This will likely generate more income than asking members to add benefits to an empty list. You may even want to include a package for which you expect very few people to sign up, whose sole purpose is to serve as a “decoy” and attract the member to the remaining packages, which seem to offer much more attractive benefits and value for money in comparison, both for the member as well as for the greater good.
Serving, Not Undermining, the Mission
Profit is clearly not the organizational purpose in the social sector, but recurring revenue is an effective tool to help nonprofits better fulfill their goals. Organizations should remember to offer their customers flexibility, rather than forcing them into a one-size-fits-all offer, and pricing and packaging structures need to be designed to drive growth while maintaining member satisfaction. Learning from current business insights is a smart way to approach sustainable revenues—in the end, what counts is for memberships to serve and not undermine the mission, and content and prices need to be selected with the needs of members and beneficiaries in mind.