Understanding Fee-for-Service Models
Thorough planning is essential when you’re implementing a fee-for-service model.
The most important thing to remember for any organization considering a fee-for-service approach is to plan thoroughly. Having a business plan, conducting a market analysis, and considering both what you have to offer and who might be willing to pay are vital pieces of the planning process.
This lesson will help you understand fee-for-service models and implement one for your own organization.
At the end of this lesson you will be able to:
- Explain several fee-for-service models.
- Identify the best model for your organization.
- Assess your organization’s core competencies and your ability to launch a fee-for-service venture.
- Apply the necessary planning elements prior to launching a fee-for-service model within your organization.
A fee-for-service model can help an organization generate revenue to cover its expenses.
The term “fee-for-service” applies to mandatory, voluntary, or requested fees that a user pays for services provided by a nonprofit organization. These fees allow the organizations to generate revenue. Many nonprofits rely on fees charged for services provided to cover the direct costs of the services.
Fee-for-service models are becoming more popular as faith-based organizations and community organizations experience both decreases in funding and increases in demand for their services. Additionally, expanded competition among organizations for the same capital sources adds to the scarcity of resources.
There are five commonly used fee-for-service models.
The five types of fee-for-service models include mandatory, voluntary, or requested fees; membership programs; and hybrid approaches. You can pick and choose elements of each to create the best model for your organization. The information in the following chapter will help you identify the optimal model for your group.
Mandatory fees are predetermined prices or fixed fees charged by an organization based on specific criteria. To meet legal and IRS standards, these fees must be below the “market rate,” i.e., the amount that would be charged for similar services by a for-profit or private organization. Public universities, hospitals, and state and national parks operate under a mandatory fee model.
A voluntary donation model is when services are provided for free, but donations are requested to cover the costs. This method is a good way to introduce the concept of paying if the population you serve isn’t used to paying fees. This strategy is the least invasive, but it’s also the least effective. Without more extensive information on what the fees cover or what the services actually cost in terms of labor and supplies, people are not as compelled to give. Those who do give tend to offer small amounts.
"Requested" fees are donations requested for each service provided to make clients aware of the cost to the organization. This is a more direct method, and it usually involves a published menu of services that lists the costs of offering each service. Donations offset the expense of each service. Potential donors are given the message that their gifts can help improve services because they have a more comprehensive sense of the costs involved and what the organization can (and can’t) accomplish with their money.
Membership fees are lump-sum fees for services provided at no or low cost. For example, a small nonprofit organization may pay a fee to be a member of a regional services group through which it receives training or resources. These membership fees are sometimes on a sliding scale proportionate to the group’s operating budget. An organization with a smaller budget would pay lower fees, and fees would increase as the group’s budget grows.
Finally, a hybrid approach is a blend of the other models. It can encompass fees, voluntary donations, and even free services. For example, one U.S.-based organization of youth- and family-serving agencies employs a hybrid approach: the group charges annual membership fees, but also offers a la carte and free services. Discounted and exclusive services are available for members.
Consider the grants you receive and the people you serve.
If your organization is considering a fee-for-service structure, look into potential conflicts with concurrent grants. Be aware of the laws and regulations that apply to each grant you have. If you have a Federal grant, certain Federal laws may prohibit you from profiting from products created using Federal funds.
Additionally, it’s important to understand your clients. “Segments” are the different groups within the entire population you serve. They can be created by dividing your client base by a specific characteristic, such as income level, and can help you optimize the way you use a specific fee-for-service model. For example, implementing a sliding scale of payments based on a client’s revenue is one way to use segmentation; a client with lower revenue would pay less for services. Segmentation is a deliberate, strategic method for gathering donations based on financial ability and level of services needed. Using segmentation can offer your clients a sense of fairness and lend your group greater transparency.
Establishing your "break-even" point can help you figure out how much to charge for a service.
How do you know what fees to charge or how great a donation to ask for? You can determine these levels by establishing your “break-even” point—the price level at which you neither make nor lose money on offering a product or service.
Follow these steps to establish your break-even point:
- Determine the “units of sale” you will be offering. (Is it a single training, or a series of trainings with one fee? A children’s activity/event, or an ongoing afterschool program?)
- Make a list of the fixed costs associated with the product or service.
- Make a list of the variable costs associated with product or service.
- Add the costs.
- Determine sources of revenue you already have to cover the costs, and determine what sources of revenue you still need to cover the costs.
- Any additional revenue needed is the price per unit you will charge to be able to cover your costs. You have now established your break-even point.
Appropriate pricing is key to a successful fee-for-service model.
Once you’ve established your break-even point, you’ll know what your organization needs to charge to stay afloat. Now you have to think about whether your clients will be willing to pay the price. To make an educated guess, consider the going market rate for services similar to those your organization offers. What are competitive service providers charging? Are these competitors for-profit groups or non-profit groups? (Your rates should align with other non-profits.)
If your prices or fees are significantly higher or significantly lower than your competitors, consider the implications: If you’re low, perhaps you can increase your fee and pay your volunteers more, or invest in more supplies. If you’re high, you’ll need to think about how to raise additional funds so you can lower your fees to a more suitable range. Figuring out the appropriate fees for your products or services requires time, energy, and research.
Remember legal and tax ramifications.
When charging fees for products or services rendered, your organization must keep three important considerations in mind:
- Your fee must be less than a for-profit group would charge for a similar service.
- The product or service that generates the fee must be associated with your organization’s mission. (If it isn’t, you may be subject to the Unrelated Business Income Tax, or UBIT.)
- Your fees must be completely voluntary. While it’s okay to ask for a donation or publish a “suggested” or “requested” fee amount, an individual must not be coerced into paying. A coercive action would be one that makes the organization or person feel that the good or service was not really free and the donation not voluntary. Take care not to give even an impression of coercion.
Identify your product, fee model, and policies.
When your organization is implementing a fee-for-service model, it’s critical to concretely define and describe your core area of expertise, or one service or product. What are you offering to the people or groups you service?
Next, identify an appropriate fee-for-service model. Determine which model or models will work best in gathering fees for the core expertise, service, or product.
Consider what policies and procedures will need to be in place. Determine what the operational policies and procedures for the new venture will be; how you will ensure that your selected strategy conforms to these operating procedures; and any government regulations, laws, and other guidelines you need to keep in mind. Additionally, consider:
- How you will communicate changes to key stakeholders
- The standards that need to be introduced to staff, and the training that may be required
The bottom line: Think through every area that makes you pause, and create a policy and procedure around it.
Determine roles and responsibilities, the resources you need, and your business plan.
Carefully consider the duties your group will need to undertake and the appropriate person to handle each job. What staff or volunteers do you already have on board to help you implement your new model? Who will handle communications and marketing management, oversight of financial and legal implications, and the business plan review? If this is a major change for your organization, make sure you involve the right people in strategic and meaningful ways. Will they be board members, staff, or stakeholders from the community (constituents, donor representatives, community representatives)? Will it be some of these, but not all? Answering these questions will help build support and ensure your strategy is successfully and carefully executed.
Determine what human and other resources you need. Consider what resources you need to implement this strategy. Do the resources come from within or without the organization? Are you going to have strategic partners? Consider the cost associated with the venture.
Develop your business plan, which is the blueprint of your business venture and the most important document when engaging stakeholders. It encompasses a focused and systematic approach to the planning and implementation of the business. Even though it is a labor-intensive task, it will help you avoid potentially costly pitfalls.
Outline your budget and a work breakdown structure.
Get a clear sense of your budget. All revenue development strategies have an initial and operational cost. Make sure that your organization has the necessary financial systems and resources in place prior to starting the initiative. In addition, recognize that the venture will cause a financial drain to your organization for some time before it starts generating revenue.
Create a work breakdown structure or planning method that works for you to outline each component of work.
Keep risk management in mind and make plans to evaluate.
Keep risk management in mind. Brainstorm, ideally with a group, the possible risks associated with your proposed strategy. Determine the likelihood and potential impact of each risk. Put a plan in place for managing the risks—particularly those with high likelihood and high impact, and those with low likelihood and high impact.
Make plans for evaluating the success of the venture. You might consider developing a logic model complete with activities, outputs and outcomes, and guidelines for measuring achievement of the desired outcomes. Ensure that your plan includes when and how you plan to evaluate.
Review the ten essential elements of implementing a fee-for-service structure.
As a review, here are all ten steps for implementing a fee-for-service structure. You may want to save, print, or consult this list in the future.
- Identify a core area of expertise, service, or product.
- Identify an appropriate fee-for-service model.
- Consider what policies and procedures will need to be in place.
- Determine roles and responsibilities.
- Determine what human and other resources you need.
- Develop your business plan.
- Get a clear sense of your budget.
- Create a work breakdown structure.
- Keep risk management in mind.
- Make plans for evaluation.
Thank you for taking the time to learn about fee-for-service models. With this information in hand, you should now be equipped to:
- Explain several fee-for-service models;
- Identify the best model for your organization;
- Assess your organization’s core competencies and your ability to launch a fee-for-service venture; and
- Apply the necessary planning elements prior to launching a fee-for-service model within your organization.
Explore these resources for additional information.
For more information, check out the following resources:
Unrelated Business Income Tax (UBIT)
This publication will help you discern the circumstances that make an organization subject to the unrelated business income tax (UBIT). It also includes the filing requirements, information on which practices are considered to be unrelated, and where to go if you need additional information.
Small Business Administration (SBA)
The SBA contains a wealth of information regarding small business startups and maintenance, and the website provides free tutorials and resources. Below you will find links relevant to the fee-for-service model:
Small business assessment tool
This assessment tool is designed to help you better understand your readiness for starting a small business. It will prompt you with questions and assist you in evaluating skills, characteristics, and staff experience as they relate to your preparedness for starting a business.
The Small Business Training Network (SBTN)
SBTN is a virtual campus providing quality and targeted online training to meet the information needs of prospective and existing small business owners.
- To learn how to do a business plan, go to:
- Course: http://web.sba.gov/sbtn/registration/index.cfm?CourseId=27
- Template: http://app1.sba.gov/training/sbabp/bptemplate.pdf
SCORE is a nonprofit association dedicated to educating entrepreneurs and to the formation, growth, and success of small businesses nationwide. They offer: