Demystifying Revenue Diversification for Associations

Written by Ken Monroe

Chairman & CEO, Bostrom

A Guide to Building New Revenue Sources Into Your Business Model

Members are the lifeblood of an association. Traditionally, membership was the primary income source for the organization. Today, while membership is a critically important revenue source and member satisfaction metric, maximizing non-dues revenue is a major goal of most associations because members have become increasingly sensitive to dues levels and more demanding of a clear value proposition based on perceived cost-benefit relationships.

Revenue diversification is important for several reasons. First, a diversification strategy minimizes financial costs to members and decreases the organization’s dependency on a sole revenue source.

(1)  Additionally, it makes it easier to raise capital and easier to do budgeting and long-term financial forecasting.
Pursuing non-dues revenue has become more complex over time as the more traditional and obvious non-dues revenue sources (e.g. publication advertising and event sponsorship) have become less viable for any number of reasons. Smart, well-managed associations use a systematic, information-driven approach to diversify their revenue profile.
Identifying and Pursuing Revenue Diversification
There is no single right way to achieve revenue diversification. However, if you are thinking about revenue diversification (or if you are not, consider this article a good reminder), keep in mind these six concepts:
Understanding Your Business Model
Before reviewing individual revenue sources, you need to understand your organization’s business model. (See “Managing and Adapting Your Association’s Business Model” in the Fall 2014 issue of SOLUTiONS). In many organizations, the description of the business model is simply an inventory of revenue sources without much analysis of how the various revenue sources create the organization’s financial profile. Increased availability of rich marketing data, together with more sophisticated analysis, courtesy of big data, greatly enhances the basis for a deeper understanding of the business model.
Making the business model more transparent starts with asking fundamental questions about “what business are we in – really?” It involves answering three questions:

  • How do we create value?
  • For whom is that value created?
  • Are the things we do to create value consistent with our mission and vision? If not, do we modify the mission and vision and/or create additional or different types of value?

Once the business model is described more fully, ask some basic strategy questions:

  • Is this the business we thought we were in?
  • Is this the business we want to be in?
  • Is this the business that will sustain the organization?

(2)  Assessing Your Revenue Sources
A deeper understanding of your organization’s business model will provide a sound foundation for evaluating non-dues revenue sources. For starters, make sure you understand the non-dues revenue sources you have, including a clear analysis of what each contributes to the organization in the context of its business model and sustainability. Answer these five questions to assess your organization’s revenue sources:
What gross revenue is generated (three year trend)?

  • What is the cost to generate this revenue and what is the resulting net revenue? This is a critical step in the analysis, and it is essential that the net revenue potential be assessed realistically and not exaggerated based on wishful thinking. An initial threshold of minimal net revenue that will make any potential revenue source worthwhile should be established at the beginning of this step.
  • How does the activity related to this revenue source contribute to the organization’s mission and vision?
  • How does this revenue source fit into the organization’s overall business model?
  • What trends are related to this revenue source and what are its prospects? Does it have growth potential or is it a “mature market” that only will sustain itself or possibly decline? If the latter, is it critical to the mission and vision of the organization to pursue it? What is the exit strategy if this revenue source becomes a liability? What are the metrics that will be monitored and the trigger points that will initiate the exit strategy?

(3)  Identifying New Revenue Sources
Once you have a clear understanding of your business model and the current revenue profile, you will be equipped to identify and assess potential new revenue sources. One approach to identifying new revenue sources is to consider markets that relate to members and their needs as one cluster and those that are non-member-related as a separate cluster.

  • For the “Member Market Cluster,” seek insights from member research and feedback on the changing needs and sensitivities of members. Add to this your knowledge about trends impacting your members to identify emerging needs. From this analysis, identify potential business opportunities with revenue potential and for each opportunity, conduct the following analysis:
  • In the context of a prioritized list of member needs, how important a need does this potential revenue source address?
  • How directly does it address that need?
  • Who else (either within the association sector or beyond) is addressing that need? What could this association offer that would differentiate it?
  • With which organizations could you partner in pursuing this potential revenue source, and what are the implications (both positive and negative) of such a partnership?
  • What association resources would be used to pursue this revenue source at a scale that would be worthwhile:
  • Capital?
  • Staff expertise?
  • Production and distribution processes and related equipment/supplies?
  • Marketing needs? What net revenue potential can be expected (at this stage these are high level estimates only; more in-depth business cases will be made later as the list of potential opportunities is narrowed to those with the most potential):
  • Near term (1-2 years but variable with each revenue source)?
  • Longer term (2-5 years or longer)?
  • What is a reasonable break-even expectation (dollars and time)?

Conduct a similar analysis for the “Non-Member Market Cluster,” with the addition of these questions:

  • How broad and how “approachable” is this non-member market and what does this association offer that would be attractive?
  • Who are other market players, how strong is their market position, and why do you think you could compete and win? Do you have any current “presence” or “identity” in this market?
  • Is there potential to partner with an organization already in this market? If so, what would your organization contribute to such a partnership? What are the potential downsides of such a partnership?
  • Is there potential for members to interpret an activity aimed at a non-member market as diluting the organization’s commitment to their needs? If so, is the financial potential of this opportunity sufficient to move ahead and how will you manage those member concerns?

(4)  Prioritize Potential Opportunities
Once you have developed a list of potential non-dues revenue opportunities and conducted a preliminary analysis based on the above questions, it is likely that the list will include many more opportunities than can be pursued. Use the following questions to help you prioritize the opportunities:
How much financial and staff resources are available to pursue new non-dues revenue sources, and how does that translate in terms of the number of opportunities that should be targeted in the prioritization/selection process?

  • Which potential opportunities best meet the following criteria (each of these should be rated on a simple “A,B,C” scale with the ratings defined in the context of the specific item):
  • Offers the most short-term net revenue potential?
  • Offers the most longer-term (3-5 years or longer) net revenue potential.
  • Is the most affordable to pursue in terms of staff time/expertise, capital, and annual operating expense?
  • Addresses the strongest market?
  • Has the best chance of short term success (not just net revenue potential, but also creating a market position, etc.)?
  • Is the most consistent with the organization’s mission and vision?
  • Has the most acceptable overall risk (both financial and other)? Keep in mind that the “most attractive” risk is not necessarily the least risk.

(5)  Preliminary Selection of Opportunities
After you have prioritized potential opportunities and you have a number of opportunities in mind, you’ll see some opportunities will have more potential than others. However, prioritizing alone will not lead you to the best options. Some options will be stronger on certain criteria than others and a balanced team of managers and content experts will need to have in-depth discussions and ultimately determine which opportunities to pursue.

(6)  Vetting the Selected Potential Opportunities
The process of identifying, assessing, prioritizing, and selecting potential opportunities yields a small number (possibly only one) of opportunities to develop. For each potential opportunity, develop a formal “business case” that includes:

  • Financial modeling (with all critical assumptions clearly spelled out), including revenue and expense estimates, capital requirements, and cash flow forecasts
  • Market analysis based on both internal and external data, and more formal market research (if available), specific to the potential opportunity
  • Risk analysis that includes both the upside and downside potential
  • Staffing needs (numbers and expertise)
  • A marketing plan that identifies key target markets and communications strategies
  • A “likelihood of success” analysis and an exit strategy with metrics and trigger points

Final Decisions and Implementation
Once the business case analysis is completed, a management and/or board decision is needed for each of the potential non-dues revenue opportunities. The decision may be difficult in some cases, but the nature of the decision and its potential implications, including risks, should be clear.

Embarking on an analysis for non-dues revenue sources may begin with an initial assumption about the need to expand and stabilize the organization’s revenue base through diversification. However, it is only after going through a systematic analysis such as suggested above that the organization can really make the decision about if pursuing revenue diversification is an appropriate strategy. If the analysis results in the conclusion that the potential revenue diversification opportunities are too risky or have only limited potential impact or probability of success, then other strategies to ensure financial stability should be considered. Alternatively, if the analysis indicates good potential for one or more of the non-dues revenue sources, the organization should seriously consider that plan of action.

Implementation will vary significantly, depending on the opportunity. Establish a realistic time frame for gearing up and installing the metrics that will be used to monitor progress so that you can make changes at pre-determined trigger points along the way. Whether your organization has in-house revenue diversification expertise or you engage an outside expert, follow a thoughtful process to maximize success.

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