social delta

Consulting and support for social enterprise in Canada

Tag: pricing

Good pricing practices for Social Enterprise

Perhaps one of the most common question social entrepreneurs have is how to set prices for their goods or services.

Pricing is a particular challenge for mission-based social entrepreneurs; in a mission-based social enterprise, the consumer is the beneficiary. For example, the product they sell (whether a good or a service)—such as environmentally friendly paints–is serving the social enterprise’s environmental mission directly. For them, good business means not only maximizing net revenue (using a higher price), but also maximizing the number of rainbarrels sold to mitigate water run-off. (using a lower price)

This can be a real conundrum.

However, pricing is not a guessing game, and need not be feared. Here are six basic principles for the new social entrepreneur to keep in mind when setting prices:

  1. Determine your pricing strategy: Are you trying to attract customers in a crowded market? Are you trying to maximize profits to fund social programs? Are you trying to get rid of excess inventory? Are you trying to maximize sales while covering costs? Each of these goals will inform your pricing strategy. Market penetration might require a loss leader, where your selling price is lower than the competion, but also may be below your cost. Freemium pricing allows you to give excess product away if another product is purchased at regular price. Value-based pricing will set a price based upon a consumers perceived value of your product, and will typically maximize profits, but this often requires strong marketing.
  2. Know your costs. No matter what pricing strategy you employ, you will need to know your unit cost. This is calculated by adding the fixed costs (overhead) to the variable costs (typically input costs of goods sold) and dividing by the volume produced. Generally speaking, prices that are lower than unit costs are unsustainable over time (loss leaders, door crashers, freemiums), prices at unit costs (absorption pricing) will sustainably maximize sales, and pricing above unit costs will endeavor to maximize profit (cost-plus, value, or premium pricing). An entrepreneur will always know and understand the unit cost of their products, and their pricing will invariably orbit around those costs depending on their marketing goals.
  3. Understand your competition. If others are selling something comparable to your product, know their prices, and take time to understand their value proposition. Their packaging, their branding and their public outreach will likely be designed to allow them to increase their prices based upon perceived value. If you know your costs, and you have a strong value proposition to compete with them, you can set your price closer to theirs (or above, see next point) in order to maximize revenue, or closer to cost to maximize market penetration.
  4. Be bold. Trust that your product is as good (or better) as any competor. Design it to be both needed and wanted by consumers. Don’t lower your prices out of humility. (only lower prices if it is jeopardizing your marketing strategy goals)
  5. Be flexible. If you lower your prices to below cost, do so with a limited time horizon. You may need to reduce prices if the market changes. Conversely, if demand is stong, you may want to incrementally nudge your product up to increase net revenues.
  6. Follow proven practices. Be aware of the value paradox, where consumers will not see your product as having any value if the price is too low (or free). Consumers see rock bottom prices as an indicator of poor quality or flawed goods. Try some pricing tricks like bundling (where multiple products are sold together), nudging, or decoy pricing. (read this great article on the decoy effect). There are many proven approaches to pricing and researching which best practices can be applied to your business is time well spent.

A word on sliding scales…many social enterprises express an interest in setting prices based upon the consumer’s ability to pay. They often ask about sliding scales or occasionally “pay-what-you-can” options. Although this approach may be seen as a way to promote equitable access to your product, it is a very difficult way to maintain a business, because input and overhead costs rarely are set on a sliding scale.

However, there are approaches that are more sustainable, while still being inclusive. Tiered pricing (also known as price discrimination) allows for a series of stepped prices based upon proven criteria: tiered prices can be set by age, by income level, by profession (like current preferred pricing for front-line pandemic workers), or by services offered (first class, box seats, etc). Social Delta frequently recommends setting the price, and then offering discounts or bursaries to those who qualify. In this approach, the perceived market value of your product is clearly associated with a specific price (which would cover costs), but your business is willing to sacrifice revenue to ensure that it is responding to the needs of excluded customers.

Setting a price for your product requires a clear understanding of your business goals, a rock solid knowledge of your business costs, and an awareness of your competition. There are no rules to setting the right price, and if there were rules, there would be many exceptions to each rule. However, setting price is not a guess, nor is it magic. Setting prices is 90% diligence and 10% good fortune

Social Delta can help you with determine which pricing strategies and approaches to consider to meet your goals.

Cultural Social Enterprises: Admission fees or “entrance by donation”?

Many social enterprises with cultural missions (museums, galleries, recreational facilities, or ongoing or travelling events) struggle with how to set admission prices, and many revert to a “jar at the door” asking for donations.

Spoiler alert: charge admission.

I firmly recommend to any social enterprise that they set prices (including admission fees) based upon a sound understanding of their cost structure, and how much they need to charge their guests they expect to visit their location to attempt to cover these costs. This recommendation is borne out of experience and logic for any business. For cultural social enterprises, they may not cover all of their costs, but charging an admission fee—over an admission-by-donation strategy—has many benefits described below:  

Admission fees are professional

In 1st century BC, Publilius Syrus wrote: “Something is only worth what someone is willing to pay for it”. This is perhaps a bit simplistic, as the truth is that a sustainable price represents the point where both the customer and the business both are getting a good deal (or at least neither is  getting a raw deal). Charging visitors for admission simply states to your customer that you have spent money to create an experience for them, and they need to spend money to enjoy the experience. All agree that good experiences cost money. Now there is nothing left to do other than haggle over price.

Free, however, suggest that the museum doesn’t pay for, or doesn’t care about, or perhaps doesn’t even know the costs of their service. The assumption by the consumer, paradoxically, is that the experience is likely not going to be very good. In the bizarre world of consumer expectations, free stuff is low quality and useless, and expensive stuff is better quality or valuable. (just think of drinking water or wrapping paper)  Charging admission says that you are professional and that your business value proposition is important and valuable.

Admission fees do not decrease attendance

If you lose 5% of your customers due to the application of an admission fee, that would be a shame, but studies show that admission prices don’t actually decrease attendance. Some even argue that museums and cultural attractions actually get more customers by charging a “professional” amount (see above). A study in 2015 of 98000 adults in the US actually concluded that in most instances, audiences indicate greater intentions to visit organizations that charge more than $20 for an adult admission than those that are free.”

The decision to visit a museum, gallery or event is affected by many factors and price plays a smaller role than most believe. Family history, geographic proximity (especially for travelers), hobbies and interests, marketing and promotions, available time, or availability of alternatives all play a pivotal role in attendance numbers for cultural social enterprises. After all, if you travel to Paris, do you really care what the price of admission is to the Louvre? You are already committed: once you’ve paid for the flight, hotel, meals, and your time…the admission could be 50 Euros before you would even blink.

Admission fees will generate more total revenue than donations

If 100 people come to your attraction and you charge them $10 to get in, you’ll earn $1000 in gross revenue. If 100 people come and are asked to make a suggested donation, you’ll be lucky to get $500 in revenue. It varies by event, attraction, demographics, region, and product, of course, but in every study I’ve read where a “suggested donation amount” is posted, the actual donation is 25-50 percent of the posted amount, even when the posted amount is significantly less than what the market would bear. This is lost revenue and lost opportunity for your cultural business.

There are tricks to try to increase donation amounts. Some have tried offering a choice of recommended amounts (and the results show that most people choose the median recommendation or less). Some have considered a sign saying that other patrons have historically given a certain amount (and this helps to bump up the average donation slightly).

One particularly creative example is from the The Contemporary Arts Museum of Houston (CAMH), which doesn’t charge admission and prefers to accept donations. They put out a donation box old-school style with a sign on it that reads: “Average cost per visit $22. Your admission charge $0. Suggested donation $5” This approach increased their average donation slightly, because it listed a factual cost (calculated from the previous year’s financials) as a benchmark allowing visitors to confer value upon the experience they are about to have. This is a clever approach, but still an approach that generated less revenue than a straight $10 admission fee.

Your gift shop benefits

Most cultural social enterprises have an opportunity for a secondary spend. What this means is that your visitors to the main attraction will (of course) be encouraged to visit the gift shop, the ice-cream stand, the café, or the special exhibit. It turns out that visitors who don’t pay for admission are also far less likely to spend money in other parts of your establishment. A good example comes from Cedar Rapids, which offers free admission for about two months a year to their Museum of Art. Their attendance during those promotions (contrary to most data) does increase, but as noted by the business owner “the average donation in the donation box remains in the range of 25-35 cents per person and the average amount spent by those who enter the gift shop plummets from about $13 to about $3.”

You can track and plan marketing and promotions

If your customers have to pay to get in, you can get more information from them that can help document your marketing success or guide your future promotions efforts. Where do they live? How many people are in their party? Did they question the price? Did they request a family rate? Did they use VISA, MC or AMEX? How did they hear about you? Did they use a coupon or a promotion through their hotel?

The act of collecting a fee allows for an interaction (either automatically by the point of sale software, or through conversation). Every time a business can interact with a client, it is an opportunity for improving customer service, retention, and renewal and another way to inform future marketing efforts. A donation box is normally anonymous (to protect the dignity of the donor), and thus represents a lost opportunity for business development.  

Increased social outcomes

Although my data on length of visit of paying vs non-paying customers is largely apocryphal, visitors who have paid to get in to your exhibit are likely to “savour the experience” just a bit more, in order to get their money’s worth. In an art gallery this is often the experience for special exhibits; visitors will pay to see the Monet exhibit, for example, and even if their fee allows them free entrance to the regular collection, many will either forego the gallery’s resident collection, or they will rush through these works of art after hours of peering at the “valuable” art in the special exhibit.

Most cultural social enterprises want people to learn, enjoy, and engage in the mission of the business. Knowing that your customers will read every plaque, pause at every display, and ruminate on how this affects them is certainly a goal equal to or more valuable than the mere volume of visitors.

Admission fees force good business practices

It is true that if you charge a fee, your customers will expect more from your business. Many museums and cultural exhibits are struggling to maintain visitation levels in a world of virtual reality, internet museums, and so many fantastic blogs and websites devoted to capturing and curating history and culture. It is important for all cultural businesses to strive to find new ways to capture the attention of new audiences. Not only will admission fees generate revenue to help run the business, it will also force your board, staff, volunteers and content curators to work diligently to create excellent experiences for customers. There is little incentive to update, change, review, digitize or improve your collection or experience if the customer is not demanding it. 

You can still be accessible

In my experience, the key rationale made to solicit voluntary contributions is to allow everyone to enjoy the museum, installation or activity. “Maximize accessibility” is the mantra. After all, if the mission of the business is to promote culture, then it may seem logical to not create any financial barrier to entry. For fully funded organizations, I accept that “admission by donation” will be fine, as the business costs will be covered by grants or sponsorships. However, the fully funded cultural social enterprise is a unicorn; people claim they exist, but I’ve never seen one.

It is possible to offer bursaries, school programming, or discounted days for those who are unable to pay. There are many creative examples of dignified programs and promotions that can help those for whom a small admission fee still is a concern.

Fees are guaranteed. Donations are fickle.

The other argument I often hear is that donations do not have a ceiling; that is to say, a donation request might yield a $1000 contribution, and surely that possibility makes an “entrance by donation” strategy worth considering.  When faced with this assertion, I normally ask how many large gifts has the business ever received in this manner, and were they able to properly receipt, track and cultivate that donor? More often than not, there is no evidence that such a gift had ever been received, nor is it truly likely to be expected through that mechanism.

The truth is that even if there were to be a “huge gift” in the donation jar, perhaps once in a year, by fluke (every fundraiser knows that “people give to people,” after all), it is likely that the lost opportunity for all those who chose not to donate would exceed the value of the larger one-off gift.

To conclude, it is overwhelmingly clear to me that charging a fee is the right approach for all cultural social enterprises.

The downside risks (fear of decreased attendance or restrictions for those in poverty) are easily managed with creative pricing approaches if it is even necessary, while the benefits of an admission fee are significant. Under set admission fees, revenue is more stable, predictable and lucrative, and the organization is more professional and effective. Fees don’t need to be exorbitant, but they should at least reflect the costs of the business that have not been covered by donations, endowments, or sponsorships.

Regardless of the size of your business, charging an admission will help your social enterprise remain in business, impress and engage your customers, and most effectively promote your cultural or social mission.

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