Understanding Fee-for-Service Models

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.

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:

1. 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?)
2. Make a list of the fixed costs associated with the product or service.
3. Make a list of the variable costs associated with product or service.
4. Add the costs.
5. Determine sources of revenue you already have to cover the costs, and determine what sources of revenue you still need to cover the costs.
6. 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.

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.

When charging fees for products or services rendered, your organization must keep three important considerations in mind:

1. Your fee must be less than a for-profit group would charge for a similar service.
2. 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.)
3. 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.