Revenue, payroll, and pricing are the three key factors that influence an association management company's profitability, according to Al Bates of The Profit Planning Group. Learn Bates' strategies for effectively managing all three and maximizing AMC profit.
Al Bates of The Profit Planning Group is a perennial favorite among attendees of AMC Institute events. His appearance at the 2013 AMC Institute Annual Meeting did not disappoint, as his no-nonsense (yet humorous) approach to the subject of association management company finances brought immense value to for-profit AMC owners and principals. Surprisingly, his advice holds pearls of wisdom for nonprofit leaders as well. I found that underneath his statistical analysis and numbers-driven approach is management advice applicable in all organizations.
He preaches that an organization's revenue and payroll must be thought about at the same time; pricing (or what an association charges for its services) is almost always critical to an organization's success, and organizations must have a plan to consistently improve financial performance.
These three steps sound deceivingly simple. To wit, most organizations have "financial plans," but the real heart of the issue is whether the plan is a specific action plan to improve an organization's financial performance. And make no mistake, all organizations in today's economy need to think about improving economic performance. So, how does Bates recommend that an AMC build such a plan? That is where revenue, payroll, and pricing considerations come into play.
Most organizations set a goal to increase revenue by some amount at budget time. The question then becomes "By how much?" There may be measurable reasons to expect huge gains in revenue, such as membership growth, a booming economy, or expectations of event revenue growth. However, year in and year out, organizations should use benchmarks more accurately linked to historical economic factors. Bates recommends the inflation rate, which for years has hovered in the 3 percent range. His advice: Plan to increase revenue by the inflation rate plus a "safety factor," which he pegs at 2 percent.
In these times of cost cutting and uncertain economic performance, employees are rightly concerned about whether their income will increase over time. Bates recognizes what all organization leaders should: Over time, employee compensation should at least keep pace with inflation. So, he recommends that payroll should increase only to an amount 2 percentage points less than sales. As an example, if an organization projects revenue to increase by 5 percent, then payroll should increase only 3 percent.
Bates said that "the only thing you ever need to know for successful price management" is that no two organizations ever offer the same product—there are always qualitative differences that should be used to influence pricing. He illustrated his point with two poignant examples. First, he noted that branded items are easy. For example, consider the difference between a Rolex and a Seiko watch. Both brands provide the same basic service, keeping time, but whether by appearance, allure, or comfort, consumers are willing to purchase a Rolex at a significant difference in price.
In a typical organization, a clear-cut brand difference will be more difficult to discern. Consider heart surgery, which would probably be a poor candidate for selecting by lowest-price bidder. Organizations should carefully consider what qualitative difference they offer when pricing their products and services.
If revenue and payroll are thought about in concert, pricing of services is accomplished in a manner commensurate with the qualitative difference an organization offers, and the organization develops and executes a financial improvement plan, profit (or positive net revenue) will result.
For the company owner or principal, profit will be his or her reward for taking the risk and investing the time and effort into building a business. For a nonprofit organization, positive net revenue allows the building of capital reserves, more aggressive employee compensation, or reinvesting in efforts that reinforce the organization's mission. By following the Bates model, profit or positive net revenue becomes a much more likely financial outcome for organizations.
Bill Yanek is president of Centric Management and Consulting in Topeka, Kansas. Email: [email protected]