The Value of Knowing Your Costs

Know these key steps to determine your association's real costs and to update your association's prices accordingly.

As a student of association finance, I am mystified by the number of organizations that do not know the true cost of what they are selling. If you ask association executives if they know the cost of a particular product or service, most will say "yes." However, on further inquiry, the vast majority are referring to the direct cost, and, often enough, only the out-of-pocket direct cost.

All too frequently, associations that do not know the full cost of what they are selling are selling at a loss. And there is no more powerful a lever to use to raise prices in hard times than to say, "We can't continue to sell this item at a loss."

Knowing Your (Real) Costs

Two Keys to Changing Prices

Once you know your true costs, you may find that items you thought you were selling for a gain are actually selling at a loss. Can you immediately increase the price to break even? Probably not.

Let me share two keys to repricing in these difficult times:

1.  Do not jar your audience. Oftentimes it will take several increases over time to get the price to where it should be.

2.  Telegraph your punch. Let folks know that there will be reasonable price increases coming and that they can buy what they want before the increase takes effect. This will reduce complaints when the price increases do arrive, and should, in and of itself, bring in some "new money" before the price increase strengthens your revenue streams.

The true cost of any product or service is composed of two parts: direct costs and indirect costs. For a hardbound book, direct costs would include things such as paper, printing, and binding, as well as the cost of layout, editing, and the like.

Assuming that the book's content is from staff, another direct cost would be all personnel expenses related to producing the content (salary, benefits, and payroll taxes). If staff is involved, then the direct cost also should include such things as a portion of the office lease or mortgage and a related portion of utilities.

Tracking staff cost is not popular in associations. Most staff don't want to keep time sheets or even something as simple as a monthly level-of-effort report that lists where they invested their time. And yet staff costs are commonly the single largest expense of an association!

The right answer is to keep time sheets to track such a critical expense. The less right, but easier, answer is to at least do something to estimate the staff costs on each of your products and services. Getting close to the true direct costs is tremendously more valuable than not including any of that cost in your pricing calculations.

As an instructive example, let me tell you about a senior association executive who was bragging to me about the profitability of his annual meeting. I was proudly informed that it netted in the range of $300,000 a year. I told him that was great (it was terrific for an association of its size), but then I inquired whether that included staff time. The exec said no, but heatedly assured me that they "knew" it was really profitable.

And of course they had not applied any indirect costs either! Who knows if they were charging sensible prices?

So what are these indirect costs? You probably know them best as "overhead." They generally include such things as the association's accounting function, the receptionist, insurance, audit costs, legal fees, a portion of the executive director's time, and on and on.

Some folks like to say, "Well, we'd have these costs anyway. Why should we include them in the cost of our products and services?" The answer is simple: Indirect costs add up and significantly affect profitability. Secondly, some products consume significantly more overhead than others, which makes the perceived profitability of those products often inaccurate.

Happily, I have a straightforward solution to this common conundrum. Your accounting department, perhaps with assistance from your auditor, can readily develop a consistent method to apply overhead. A strong association can determine it very precisely, but if you are just getting by, then use a simpler method to estimate it. Just don't shortchange your pricing decisions by leaving it out entirely.

Andrew S. Lang, CPA, is with LangCPA Consulting LLC in Potomac, Maryland. Email: [email protected]

If you are an association executive with a new or improved revenue success story, please contact Andrew Lang at [email protected]. He looks forward to sharing your successes in future columns.