Earned Income - Ten Key Considerations
By Chloë Longmore, Consultant, =mc.
The ongoing recession and associated cuts in local authority spending and donations have left many third sector organisations struggling to fill income gaps. Increasingly, these organisations are looking for new ways to generate income, without having to rely on donations or grant-aid funds. One avenue that a number of charities have begun exploring is to charge for services that have previously been provided free or develop new services to drive income.
There are a variety of labels for this such as earned income or social enterprise. For the purposes of this article, we’ll use the term earned income.
Over the past five years =mc has developed experience helping organisations set up earned income streams. That experience has taught us that there are ten practical issues you need to be aware of when developing chargeable services.
Before these practical issues are explored, there is one overarching conflict that needs to be resolved. Put simply, this is whether the earned income service is primarily aimed at delivering mission or money. Charitable objectives and profit can co-exist but it’s harder than it might seem at first.
Our experience has shown that earned income services can, and do, deliver on both mission and money but that one needs to be prioritised for real success. The question is… which one?
Below is a table contrasting the two approaches. The first is an animal charity, which we helped to set up a specialist consultancy service. The driver was to increase profits and deliver a return that would fund other activities. The second example is a local carers’ charity where the decision to move to earned income was a way to extend the reach of the service and avoid overdependence on grants.
The table below contrasts these approaches.
| Case Study 1 | Case Study 2 | |
| Charity type | Animal Charity | Carer’s Charity |
| Service offering | Consultancy services: | Service Delivery: |
| Purpose | Money focus – purpose is to generate additional unrestricted revenue to fund strategic objectives that current income streams will not pay for | Mission focus – purpose is to enable service users to access the service at the lowest possible cost since statutory funding doesn’t allow a free service |
| Profit making | Yes | No |
| Staff | New staff recruitment based on ability to market and deliver services | Additional staff recruitment to complement staff with the ability to deliver current services |
| Staff Incentives | Staff incentivised to generate revenue | No staff incentives to deliver service |
| Pricing | Services priced at market willingness to pay | Services priced at point of cost recovery |
| Business to? | Business to Business | Business to Customer |
| Marketing | Marketing to existing contacts and growth from there, through referrals and the trade press | Marketing to individual customers/service users through traditional channels such as GPs, local newspapers etc |
| Growth | High investment with high growth target | Slow growth to meet market needs |
Resolving the key issue of mission vs. money will then enable the charity to determine how to organise, structure, plan and market.
So having resolved the big one, there are then a number of other issues that your organisation will need to address. Here’s our top ten:
1. Where’s the added value?: If your organisation is moving from providing free services to charging there will be pressure to distinguish the added value that customers are likely to get from the services. You will need to be able to prove that your service is worth paying for and be prepared for the fact that customers will become more demanding. For example, as a result of moving from a free to a paid-for service the carer’s charity found that customers began expecting more services to be provided such as domestic care, rather than simply care services. And the animal charity was expected to provide an ‘out of hours’ option in exchange for high fees.
2. Market: You will need to conduct some research into the feasibility of your proposed services to ensure that there is a market for them. You should do this by conducting a market test with potential customers to determine whether there is interest in your service and what the likely price point is. You need to ensure that there is a market for your service at a price that is worthwhile to you. One way to summarise this is in the phrase: ‘there may be a gap in the market but is there a market in the gap?’
3. Start-up costs: You’ll need to understand and work out the likely costs of setting up a service and establish how you can meet these costs. There may be opportunities to access funding from charitable foundations and you should explore this potential. (We successfully secured funding for a large UK charity to establish a consultancy from a charitable foundation.) There are a number of other potential sources such as government funds, and national lottery initiatives.
4. Business to Business vs. Business to Customer: You will need to decide whether the services that you offer will be primarily provided to businesses or to individuals. This choice will help you target your services and set up business processes according to different needs. In the case studies, the carer’s charity was the example of a business to customer service. Selling to customers will require a larger volume of invoicing and will also require a higher number of relationships to manage. So the charity will need to ensure that they have the resources to manage this. Business to Business relationships are likely to mean fewer, larger invoices, and fewer, more important relationships with key decision-makers in the businesses. These approaches also need different staff skill sets.
5. Internal vs. External structure: There are two ways to organise your service. One is to fit it into your existing structure. This involves either setting up a new earned income department within the existing structure or designating staff in existing departments to work on earned income services. The other way is to have an external freestanding service. This means running the earned income services as a wholly owned subsidiary of your existing organisation. This could involve having different branding and legal structure. It’s more complicated like this but safer if it goes wrong.
6. Balancing stakeholder interests: When setting up the service you will need to consider the needs of the different groups of people that you’ll be seeking to serve. This will include your customers (those who buy the service), your consumers (those who use the service), your funders (if your service is being partly funded), your donors (if your service is publically supported). Some donors may be unwilling to support an initiative that is purely a social enterprise, so you may wish to consider provision of some completely free services to show your non-profit credentials. Other donors may have certain conditions, such as in the case of the animal charity where trustees required any surplus funds to be used to support a specific area for growth.
7. Staff competencies: Staff need a different set of skills in an earned income setting. These will differ from the skills that are required simply to deliver a service. You’ll need to consider whether existing staff have the required skills and what training might be required. Skills to sell a consultancy service might include sales, the ability to work within customers’ requirements, numerical skills to be able to estimate prices for work, business winning abilities and the ability to write proposals. In the case of delivering a service, such as the carer’s charity example, staff may also require additional competencies such as debt management, or simple customer care.
8. Growth: High, medium or low: What type of growth target will you set for your service? The pace of growth will depend on a variety of factors such as the market, competition, the availability of start-up funding. A high growth target will require more start-up capital than a low growth target but is also likely to be able to achieve higher rates of return. The growth target may be largely dependent on the availability of start-up funds.
9. Marketing: High, medium or low: When setting up a service you need to consider the marketing that will be required. You will need to understand what market position you will be seeking. Marketing will have to be undertaken to a level that is compatible with the growth target. The level of marketing will also relate to whether you are a Business to Business or Business to Customer service. Business to Business will require less marketing than targeting individual customers as it will be easier to reach businesses and each contract value is likely to be higher. You will need to reach a higher number of people in the Business to Customer model.
10. Risk and sensitivity analysis: After you have gathered all the information described above, you then need to undertake a risk and sensitivity analysis. The purpose of this is get an understanding of how much changes in your estimates will affect your financial analysis. It will give you an understanding of what would happen if you charge less or more than predicted. It is important to understand that any financial estimates, are only estimates. Risk and sensitivity analysis will allow you to understand by how much your estimates can vary while still retaining the profitability of your proposed service.
In summary, many charities will be looking to expand their income streams through looking at chargeable services and earning their own income.
There will be a number of things that they need to consider but the first big question for any charitable organisation is whether their earned income services will prioritise profit-making or fulfilling their mission. When it comes to earned income it is all about mission vs. money.
If you would like more information on this article, or are thinking of setting up a consultancy or earned income service in your organisation please don’t hesitate to contact me, Chloë Longmore, at the Management Centre on 02087 978 1516 or by e-mail.
