Product Pricing for Non Profit Organizations

Product Pricing for Non Profit Organizations 

Price is the assignment of value, or the amount the consumer must exchange to receive the offering. Pricing strategy is one of the most difficult areas of marketing decision making. It deals with the methods of setting profitable and justifiable prices. A firm's pricing strategies may be based on costs, demand, or the prices of competing products. Pricing is probably the least understood and least appreciated element of the marketing mix.

Pricing Objectives of Not-for-Profit Organizations

Pricing is usually a key element of the marketing mix for not-for-profit organizations. Pricing strategy can help these groups to achieve a variety of organizational goals: 

1) Profit Maximization: 
Though not-for-profit organizations aren't typically organized to maximize profits, there are numerous instances in which they do try to maximize their returns on specific events or a series of events. A 1,000-a-plate political fundraiser is an example.

2) Cost Recovery: 
Some not-for-profit organizations attempt to recover only the actual cost of operating the organization. Toll roads and bridges, publicly supported colleges, and mass transit are examples. The amount of recovered costs is often dictated by tradition, competition, or public opinion.

3) Market Incentives: 
Some not-for-profit organizations follow a lower-than-average pricing policy or offer free services in order to encourage increased usage of the product. Seattle's bus system offers free service in the downtown area in an attempt to reduce traffic congestion, encourage retail sales, and minimize the effort required to access downtown public services.

4) Market Suppression: 
Price can discourage consumption. High prices help to accomplish social objectives independent of the costs of providing goods or services. Examples are taxes (tobacco and alcohol taxes), parking fines, tolls, and gasoline excise taxes.

Methods of Product Pricing for Non Profit Organizations

Following are the methods for product pricing:

1) Full Cost Pricing: 
Many non-profit organizations use full cost as a basis of setting the norm for prices. The rationale is fairly simple. Non-profit organizations are not set up to make a profit or a surplus. Therefore, there is no reason to price the products/ services at more than full cost. On the other hand, continuous pricing of products below the full cost will result in slow liquidation of the organization unless there are specific schemes of subsidy. Many of the programs managed by non-profit organizations, such as sponsoring research for employers, health care for employees, are customarily based on full cost reimbursement.

2) Full Cost Plus as Basis: 
Many non-profit organizations find themselves compelled to set prices to include an element of profit or surplus over full cost. The surplus is what adds to the equity or funding. Such addition to the equity enables the organization to replace assets and/or provide for additional working capital. Assets as they become worn out or obsolete, will have to be replaced. A combination of inflation and technological changes almost invariably results in the cost of replacement being higher than the replacement of the original equipment. A continuous build up of a "replacement fund' is almost unavoidable. In fact, the formulation of the policy regarding replacements and financing of replacement of buildings and equipment should be a matter of careful thought within the management of all non-profit organizations. If a replacement fund is built up over a period of time, the resources required for replacement can then be drawn at least partially from this fund. Often we find non- profit organizations putting out special requests to donors or funding agencies for a particular replacement requirement and there may be adequate response. However, this introduces an element of uncertainty in the maintenance of the quality of service, which in turn could depend on the quality or reliability of the equipment requiring replacement. The build of an equipment replacement fund has much to justify if it is possible to do so.

Some non-profit hospitals have over a period evolved a system of varying prices based on the paying ability of the patient. One rational way to do this is to charge a higher rate for all services availed of by the patients using special ward facilities. Often these institutions end up with three rates, one for special ward, one for general ward and a third one involving partial write off. These are over and above the subsidized free patient. In our section on finance we noted the practice of some institutions showing free work as 'income', at full cost and matching the total expenses against such notional income. (This practice is useful to indicate to the donor agencies subsidizing the particular service, how much they need to budget for). There is justification for using a cost plus pricing formula, where the institution is catering to the client or customer who can afford; and they also have customers who cannot afford and have to be cared for.

Two points of caution are in order. First, full cost plus pricing cannot be independent of the market prices for equivalent or similar products. These must be kept in view as possible ceiling to the prices. Second, organizations adopting a full cost plus formula for pricing a product, perhaps for a segment of the market, should do a reasonable study of costs. Then from time to time they tend to raise prices based on index of inflation or just 'gut feeling". That will not do. Periodic or annual recalculation of costs of products is very essential particularly when the product range is quite wide. Otherwise, one may end up, inadvertently, having a system of cross subsidy between products and be unaware of it.

An organization may have been set up with the purpose of making a product or range of products available to a segment of consumers at well below market prices. For example, we know of a trust set up specifically to produce essential drugs' and market them under generic names on a 'cost plus' basis. The plus factor is kept at a bare minimum and the surplus that is generated is nominal.

There is reason to be apprehensive about this operation in the long run. The surplus may probably be inadequate to sustain replacement of equipment, legitimate expansion or even normal growth of working capital requirements. 

3) Market Based Pricing: 
Medical and educational services are examples of areas where market price may be a consideration, but not a determining factor. Many of them will have a semi-monopolistic position due to location, specialization in product offered, quality, etc. Optimum pricing calls for very careful examination of all these factors.

Pricing based on the market need not be above full cost. The problem of pricing is easier to handle if the market price is already established above full cost. This is true, e.g., of the essential drugs project mentioned above, where market prices are considerably higher than the full cost. There is some flexibility in such cases

The situation becomes problematic when competition (or legislation) forces the institution to set prices at market rates below full cost. Many colleges in India are in this situation where actual operating costs are well above the fees charged to the student, primarily as a consequence of government or university regulations. The question is how does the organization cover its losses. Many professional colleges have taken the route of "self financing".

Self financing may be based on higher fees or on 'capitation' fees, a form of compulsory donation. Cross subsidy is also possible if one operation can subsidize the other. Medical college can be subsidized by an attached hospital. Annual donations from committed donor organizations particularly for a specific campaign, e.g. eradication of leprosy or immunization from polio, enables an institution to carry on a subsidized operation below full cost.

4) Inducement Pricing: 
There could be situations in which a non-profit organization purposely sets a price in order to induce the other suppliers to reduce their prices. In the case of the essential drug project, the promoters were clear from the beginning that their intention was not to force market prices down, but only to supply to select hospitals and medical centers for passing on the benefit to the poor patients. However, if it was a well organized scheme with a generous budget, it could influence market prices of essential argues in the down-ward direction. We have not come across a successful operation of this kind yet. Availability of a service at a lower cost will, per se, influence prices set under monopoly or semi-monopoly conditions.

A subsidized price is offered mostly in situations where the organization is anxious to ensure the use of the service irrespective of the ability to meet the full cost. It is always better to charge at least a nominal price instead of giving it away free. Many public authorities are on this basis of subsidized pricing. Where possible, it would be still advantageous to indicate and charge full cost and then deduct the subsidy to arrive at the selling price.

In conclusion, it may be mentioned that there is a good case for full cost plus pricing where it is possible, so long as the effective demand for product is not highly elastic to price.

Planning and Budget Preparation in Non Profit Organizations 

The workload for non profit organizations has increased, and all the while resources have grown scarcer. No longer-as if they ever could-can non profit organizations assume their funds will arrive automatically from generous donors, nor can they assume they will have dozens of capable volunteers available to work. Increasingly, funding organizations and even individual donors want to see evidence that their gifts will be put to good use. One piece of evidence they often demand is a strategic plan.

The board of a not-for-profit organization must plan by setting organizational goals and determining priorities. These are outlined in the strategic plan. The organization must ten determine the dollars needed to carry-out those goals and priorities, and this information is reflected in the annual operating budget.

1) Strategic Planning in Non Profit Organizations :

Planning is a way of looking toward the future and deciding what the organization will do in the future. A strategic plan is a tool that provides guidance in fulfilling a mission with maximum efficiency and impact. If it is to be effective and useful, it should articulate specific goals and describe the action and steps and resources needed to accomplish them.

Strategic planning is a disciplined effort to produce decisions and actions that guide and shape what the organization is, what it does, and why it does it. Both strategic planning and long range planning cover several years. However, strategic planning requires the organization to examine what it is and the environment in which it is working.

Strategic planning also helps the organization to focus its attention on the crucial issues and challenges. It therefore, helps the organization's leaders decide what to do about those issues and challenges.

Strategic Planning is concerned with: 
  • The direction in which the company should move,
  • The implementation of the plan for the subsequent period, and
  • The alternatives, which are to be sacrificed, if the plan is accepted and implemented.

Strategic planning involves more than one strategy. In other words, the strategies relating to different functional areas are involved in business planning. An activity rather than a form of organization is at the core of business planning.

According to William Glueck, "Strategic planning is a stream of decisions and actions, which lead to the deployment of an effective strategy or strategies to help achieve corporate objectives decisions and actions, which determine whether an enterprise excels, survives or dies".

Process of Strategic Planning 

The strategic planning process is as follows:

1) Establishing Verifiable Goals or Set of Goals to be Achieved: 
The strategic plan is based on the enterprise objectives. These objectives are mostly formulated by the top management, the values and beliefs held by the top management are reflected in these goals. 

2) Establishing Planning Premises: 
Planning premises include certain assumptions about the future on the basis of which the plan will be ultimately formulated. Planning premises include: 
  • Internal and External Premises: Internal premises include sales forecasts, policies and programs of the organization, capital investment, managerial competency, human resource skills, and other organizational resources. External premises include general business and economic environment, technological changes, Government policies and regulations, population growth, political stability, and social factors. 
  • Tangible and Intangible Premises: The premises, which can be quantifiable, are called tangible premises. The tangible premises include population growth, product demand, past sales, capital invested and the like. The intangible premises are those, which cannot be measured quantitatively. These premises include political factors, social factors, technological factors, natural factors etc.
  • Controllable and Non-Controllable Premises: Some factors are controllable and some are uncontrollable. Business plans are to be modified and sometimes reformulated due to the presence of and interaction of uncontrollable premises. Uncontrollable premises include strikes, lockouts, wars, natural calamities, emergency situations, etc. Controllable premises include company's labor policy, investment policy, advertising policy, level of technology, competency of managerial personnel, quality of human resources, availability of financial resources, etc. 

3) Deciding the Planning Period: 
After formulating planning premises and long-term goals, the manager have to decide the length of business plan period. The plan of the period should be based on the nature of the business, the vision and mission of the company. Other factors, which influence the planning period are:
  • Lead-time in the development of a new idea business/product.
  • Time required to get back the original investment.
  • Length of commitments already made.

4) Finding Alternative Courses of Action: 
After formulating the strategic plans, the top-level management should find out the alternative courses of actions available in order to accomplish the company's mission. For example, availability of alternative technologies, alterative sources of capital, highly skilled employees aboard, etc.

5) Evaluating the Alternative Plans and Selecting a Course of Action: 
The management has to evaluate the available courses of action through SWOT analysis (Strengths, Weaknesses, Opportunities and Threats) and rank the alternatives. After ranking the alternatives, the management has to select the best business plan.

6) Developing Derivative Plans: 
The management after selecting the best strategic plan it should formulate the other policies and plans, which are the sub-plans to the main plan. Management should involve and consult the lower level managers while formulating the derivative plans. 

7) Implementation of the Business Plans: 
After the development and selection of the plans and derivative plans, management has to take initiative to implement the business plan. 

7) Measuring and Controlling: 
After the strategic plan is put into action, the management has to measure the  progress of the plan and compare it with the standards, observe the deviations, if any and correct the deviations.

Advantages of Strategic Planning 

The advantages of strategic planning are as follows:

1) Framework for Developing the Operating Budget: 
An operating budget involves resource commitments for the next year; it is essential that such resource commitments are made with a clear idea of where the organization is heading over the next several years. A strategic plan provides that broader framework. Thus an important benefit of preparing a strategic plan is that it facilitates the formation of an effective operating budget.

2) Management Development Tool: 
Formal strategic planning is an excellent management education and training tool. It provides the managers to think about strategies and their implementations.

3) Mechanism to Force Managers to Think Long-Term: 
Managers are more concerned about managing the present, day-to-day problems than thinking about future plans. Formal strategic planning forces managers to make time for important long-term issues. 

4) Help in Aligning Managers with Corporate Strategies: 
The debates, discussions and negotiations that take place during the planning process help clarify corporate strategies, units and align managers with such strategies and show the implications of corporate strategies for individual managers.

5) Framework for Short-Run Actions: 
The strategic plan shows the implications of programming decisions for action plans in the short run. Program decisions are made one at a time and the strategic plan brings them altogether. Preparing the strategic plan may reveal that individual decisions do not add up to a satisfactory whole. Planned new investments may require more funds in certain years than the company can obtain in those years, planned changes in the direct programs may require changes in the size of support programs (e.g., research and development, administrative) that were not taken into account when these changes were considered separately.

Disadvantages of Strategic Planning

The disadvantages of the strategic planning are as follows:

1) Managements Fall To Monitor: 
Implementation of the strategic plan should be pre-planned and based on detailed action. Many times managements fail to monitor the implementation process.

2) Reluctant to Formulate Objectives: 
Some managers are reluctant to formulate objectives for their departments or jobs.

3) Afraid of Failure: 
Managers are sometimes afraid of failure, to achieve business plans.

4) Fall to Integrate Plans: 
Managers fail to integrate the plans of their departments or jobs with the organizational/company plans.

5) Unskilled Managers: 
Some managers do not have required skills to understand and analyze the external environment.

6) Mislead Forecast: 
Forecasting often becomes misleading due to wrong premises. 

7) Inefficient Planning: 
Managers due to their deficient and inherent nature, fail to plan efficiently. The uncertainties in the environment, makes the business plan inefficient.

8) Inter-Group Conflicts: 
Inter group conflicts and inter-departmental conflicts are the other important limitations of business plan. These limitations are also due to:
  • Lack of understanding about the objectives of the firm. 
  • Lack of a constructive approach to objectives.
  • Different values and personalities of individual managers.
  • Competition for scarce resources. 
  • Built-in conflict between a young manager and an experienced manager.

2) Budget Preparation in Non Profit Organizations :

A budget is a planning tool for the Non Profit Organization. A budget is a financial plan summarizing the financial experience of the past, stating the current plan and projecting it over a specified period of time in future.

A budget is a quantitative expression of a plan of action relating to the forthcoming defined period. It represents a written operational plan of management for the definite period. It is always expressed in terms of money and quantity. It is the policy to be followed during the budget period for attainment of specified organizational objectives.

According to Crown and Howard, "A budget is a pre-determined statement of management policy during a given period which provides a standard for comparison with the results actually achieved".

A budget is the keystone of financial administration and the various operations in the field of public finance are correlated through the instrument of budget. A budget is a financial report of statement and proposals which are periodically placed before the legislature for its approval and sanction. It is the report of the entire financial operations of the government and gives us a foretaste of future fiscal policy. Budgeting is the whole process of designing, implementing and operating budgets. The main emphasis in this is short term budgeting process involving the provision of resources to support plans, which are being implemented.

Features of Budget

An analysis of the definition will bring out the following features of a budget: 
  1. It is a plan expressed in monetary terms. But it also contains physical units.
  2. It is prepared prior to the period during which it will operate.
  3. It is approved by the management for implementation.
  4. It is related to a definite future period.
  5. It indicates planned income and expenditure including capital expenditure during the period.
  6. It is prepared for the purpose of implementing the policy formulated by the management, and the objective to be achieved during the period.

Qualities of an Effective Budget

An effective budget requires time and effort to develop and implement, especially for start-up organizations and those that have never prepared a budget before. Regardless of previous experience, every step of the budgeting process adds to the quality of the final document. An effective budget is:

1) Realistic: 
If a budget is to serve as a guide for fundraising efforts and program activities in the coming year, it must be well-reasoned and reflect current conditions. Unsubstantiated revenue projections and wild guess cost estimates will render a budget ineffective as a management tool.

2) Consistent: 
A budget must be consistent with short- and long-term strategic plans, and remain in line with the organization's mission.

3) Flexible: 
Budgets are based on a combination of facts and assumptions. If actual events and conditions vary from these assumptions, there must be opportunities to amend the budget to address revenue shortfalls and windfalls, and unexpected expenses.

4) Measurable: 
The basis on which the budget is created should be the same basis on which the books are maintained.

Steps in Budget Preparation 

Following are the steps of budget preparation:

1) Specification and Communication of Organizational Objectives:
Budget is a medium through which organization's objectives and policies are reflected. Budgeting is used as a tool for implementing the organizational objectives. It is essential to understand, specification and documentation of organizational objectives before the managers start for budgeting the organizational activities.

2) Determination of Key Success Factors: 
The performance of every organization will be particularly influenced by certain critical success factors, key factor will influence the activities of an undertaking and it will limit the volume of output and will have direct impact on the profitability of the organization. Critical success factors may consist of a specified raw material, a specific type of labour skill, a tool, a service facility, floor space, cash resources, etc. 

3) Establishment of Clear Lines of Authority and Responsibility: 
An organizational chart defining the lines of authority and responsibility of the managers responsible for accomplishment of organizational objectives is to be prepared. The organizational chart should define the following: 
  • The responsibility of individual functional managers.
  • Delegation of authority to the concerned functional managers.
  • Inter-functional relationship of the organization. 

4) Establishment of Budget Centers: 
Budget center is a section of an organization for which separate budgets can be prepared and control exercised. The entire organization is divided into different segments, which are clearly defined for the purpose of budgetary control according to responsibilities of departmental heads. These segments of an organization defined for the purpose of budgetary control are technically referred to as budget centers.

5) Determination of Budget Period: 
Budget period is a period for which the budget is prepared. A budget can be a long-term budget or short-term budget. A short-term budget is generally prepared for one year or lesser period. The long-term budget which extend to five or even more years. 

6) Establishment of Budget Committee: 
In small organizations, the person in charge of finance and accounting functions will involve in preparation of budgets. The setting up of a budget committee is necessary in case of large and complex organizations. As the budget involves the various functional activities, the closest association of functional managers is essential for satisfactory formulation and implementation of the budget.

7) Appointment of Budget Controller: 
Proper budget administration is facilitated by the budget controller who is made responsible for the preparation of the budget and coordinating activities of the individual departments.

8) Preparation of Budget Manual: 
Budget manual is the documentation of policies and procedures involved in implementation of budgetary control system. The budget manual contains the standardized form, which become information generation for preparation of budgets. It contains a complete program of activities involved in budget preparation. 

9) Preparation of Sales or Revenue Budget: 
The sales or revenue budget is the starting point of most master budgets. In manufacturing organizations sales budgeting begin with the forecasting of the sales of individual products. 

10) Preparation of Other Budgets: 
Once the sales budget has been determined from a range of sales forecasts it is possible to construct the other budgets.

Benefits of Budgeting

The benefits of adopting a budgeting system in the organizations are as follows: 

1) Budgeting establishes a basis for internal audit by regularly evaluating departmental results. 

2) Only reporting information which has not gone according to plan, it economizes on managerial time and maximizes efficiency. This is called 'management by exception' reporting. 

3) Scarce resources should be allocated in an optimal way, thus controlling expenditure.

4) It forces management to plan ahead so that long term goals are achieved. 

5) Communication is increased throughout the firm and coordination should be improved.

6) An effective budgetary control system will allow people to participate in the setting of budgets, and thereby have a motivational impact on the workforce. Individual and corporate goals are aligned.

7) Areas of efficiency and inefficiency are identified. Variance analysis will prompt remedial action where necessary.

8) The budget provides a yardstick against which the performance of the firm can be evaluated. It is better to compare actual with budget rather than with the past, since the latter may no longer be suitable for current and expected conditions. 

9) People are made responsible for items of cost and revenue, i.e., areas of responsibility is clearly delineated.

Limitations of Business Budgeting 

The practical problems arise, while implementing the budgeting system are as follows:

1) Budgets are perceived by the workforce as pressure devices imposed by top management. This can have an adverse effect on labour relations.

2) It can be difficult to motivate an apathetic workforce.

3) The pressure in the budgeting system may result in inaccurate record-keeping.

4) Managers may over-estimate costs in order that they will not be held responsible in the future for over- spending. The difference between the minimum necessary costs and the costs built into the budget is called 'slack'.

5) Departmental conflict arises because of competition for resource allocation. Departments blame each other if targets are not achieved.

6) Uncertainties can occur in the system, e.g., uncertainty over demand, inflation, technological change. competition, weather, etc. 

7) It may be difficult to align individual and corporate goals. Individual goals often change, and may be much lower than the firm's goals.

8) It is important to match responsibility with control; otherwise a manager will be de-motivated. Costs can only be controlled by a manager if they occur within a certain time span, and can be influenced by that manager. A problem arises when a cost can be influenced by more than one person.

9) Sub-optimal decision may arise when a manager tries to enhance his short-run performance in a way which is detrimental to the organization as a whole, e.g., delaying expenditure on urgently needed repairs. 

10) They are based on assumed conditions (e.g., rates of interest) and relationship (e.g., product-wise held constant) that are not varied to reflect the actual circumstances that come about. 

11) They make allowance for tasks to be performed only in relation to volume rather than time.

12) They compare current costs with estimates based only on historical analysis.

13) Their short-term horizon limits the perspective, so short-term results may be sought at the expense of longer-term stability or success. 

14) They have a built-in bias that tends to perpetuate inefficiencies. For example, next year's budget is determined by increasing last year's by 15 per cent, irrespective of the efficiency factor in last year.

15) As with all types of budget, the game of "beating the system' may take more energy than is being devoted to running the business.

16) The fragile internal logic of static budget will be destroyed if top management reacts to draft budgets by requiring changes to be made to particular items which are then not reflected through the whole budget.