How to Set Nonmember Fees for Association Services

Coins May 16, 2016 By: Jerald A. Jacobs

When an association offers programs and services to nonmembers, how much higher may prices be set than for members? It is possible that denying access or charging exorbitant fees for nonmembers could, in certain situations, put an association at risk of antitrust violation or losing its tax-exempt status, but legal and regulatory precedent is quite vague. This column offers a sensible approach for pricing membership services when they are offered to nonmembers.

If you peruse the membership solicitation brochure of nearly any nonprofit membership association—whether trade, professional, or philanthropic—you routinely encounter an impressive list of membership services. The brochure, and its membership benefit list, is intended to point out the advantages—to "sell the sizzle"—of membership in the association. It explains why paying dues is worthwhile.

Associations also offer many of their membership services to nonmembers, albeit usually at higher prices. This column will help clarify how to price membership services when they are offered to nonmembers, either because the association merely wants to expand the market for its services beyond the membership or because there is a strong legal compulsion to do so.

A lingering conundrum, on which very little reliable authority exists, has to do with the association's pricing of membership services when offering them to nonmembers. While associations often wish to expand the base for their services, there are also circumstances in which an association may have a legal obligation to offer services to those outside its membership. This is primarily the case when:

  1. The nonmember could not meet the membership qualifications or other condition of access to the services.
  2. The nonmember would suffer grave competitive harm if the services were denied.

Some associations treat nonmembers' requests for access to their services as an opportunity, not a problem. They may provide the services, either at the member price or not too much higher, and then treat the requester as an active prospect for association membership. Other associations though, perhaps the majority that deal with this issue, tend to regard the services they provide to members as exclusive, and therefore they arbitrarily set high prices on the availability of member services to nonmembers. The reason, quite logically, is that if nonmembers could "cherry pick" the best association services and pay only members' prices to obtain them, there would be little incentive to join the association.

The courts, the antitrust enforcement agencies, and the Internal Revenue Service have said remarkably little about nonmember pricing of association services.

So, the services are priced for nonmembers at levels that discourage cherry picking and make it cost effective to join the association instead. For example, a 50 percent nonmember markup to the member price is not unusual. Is that approach defensible from antitrust or tax-exemption points of view? Is there a better, more formulaic way to deal with the issue? Are there government pronouncements that one can rely upon?

Yes and no.

1. Limited Precedents

The courts, the antitrust enforcement agencies, and the Internal Revenue Service have said remarkably little about nonmember pricing of association services. When these institutions have made pronouncements, they seem to include few guidelines that are of practical value for associations.

Some relatively older pronouncements from the Federal Trade Commission (FTC), in the form of advisory opinions, which are not official precedents applicable generally, have noted that the price to nonmembers of purchasing association member services should not be so high as to effectively compel membership.

For example, perhaps the nonmember markup to the member price for acquiring a how-to manual should not be the same or higher than the membership dues. But those pronouncements tended to be premised upon factual situations in which there may have been a legal compulsion to offer particular membership services to nonmembers. An example might be the offering of a service such as a widely accepted or legally mandated standards or certification program without which a competitor essentially cannot compete effectively.

Thus, in approaching the issue of pricing of membership services offered to nonmembers, it makes sense first to resolve a threshold question: Is the service one that the association really must offer to nonmembers or otherwise expose itself to serious legal risk?

If not, there is likely no restriction on what nonmembers can be charged, just as there is no compulsion to even offer the service to nonmembers. If the service is offered, probably "the sky's the limit" when it comes to price.

But where there is some likelihood that the association could be exposed to adverse antitrust, tax-exemption, or other legal consequences if it were to deny a particular member service to nonmembers, then some serious attention must be paid to the pricing issue when the service is offered to nonmembers.

2. Pricing Options

Several scenarios exist when it comes to pricing services for nonmembers.

Build in development costs. The most logical approach, which was endorsed in a 1967 FTC advisory opinion, would be to set the nonmember price at a level that fairly compensates for members' subsidizing of the service.

To illustrate that principle, suppose an association offers a killer software program, the use of which has become a virtual necessity in the association's field. Members' dues were spent to capitalize the program, and members' dues are being used in part to pay for staffing and other attributable general and administrative expenses, as well. A decision is made that the software must be licensed to nonmembers, or otherwise the situation will pose legal risk for the association. There is some authority suggesting that it is safe to charge nonmembers a higher fee for the license in order to help accelerate recovery of the association's capitalization and minimize subsidization of the association's general and administrative expenses.

Consider intrinsic value. But how does an association fairly establish the nonmember price for such a competitively necessary service where there is little or no member subsidy? What if, in the example, the software had been donated to the association? Or it was developed using only volunteer efforts with no cash outlay by the association? Or its net revenues yield such an overwhelming margin that any member subsidy is minimal or nonexistent?

There is no answer from official sources; neither courts nor government agencies have provided useful guidelines for determining prices. But a sensible and likely defensible approach would be to extend the subsidy-offset theory beyond cash considerations. Virtually every activity or service of a volunteer membership association includes some element of contribution by members beyond their dues or other payments of money. Members' contributions of time, expertise, judgment, expenses, and other resources can perhaps also be considered subsidies to association member services. Whether those contributions occur in the context of governance, committee work, review and approval, or otherwise, there are ways to estimate the value of these contributions. And perhaps they too can form the basis for determining what is fair to charge nonmembers to access association membership services.

Thus, in the earlier example, even if the association's software program involved little monetary cost to develop or to offer for licensing, there might still be a significant membership contribution component (such as if members contributed, enhanced, or otherwise added value to the program). One can estimate the value of that component in various ways, such as by referencing the price of comparable or competitive software programs or by putting a value on the hourly charges that the association might have incurred if paid consultants, rather than unpaid volunteers, had contributed.

Once again, it must be noted that there is no official authority for this approach to pricing membership services to nonmembers. But the absence of precedent may give an association a bit more flexibility than otherwise.

The overriding principle must be fairness. When an association has decided that legal risks compel the offering of member services to nonmembers, an arbitrary decision on pricing runs its own risks. A comprehensive view of what nonmembers should reasonably pay to offset members' monetary and nonmonetary subsidy seems to be a reasonable approach.

Jerald A. Jacobs

Jerald A. Jacobs is a partner and head of the Nonprofit Organizations Practice at Pillsbury Winthrop Shaw Pittman in Washington, DC, and general counsel to ASAE. He is the author of Association Law Handbook, Sixth Edition, and The Legal Guide to Nonprofit Mergers and Joint Ventures, both published by ASAE.