Understanding Fee-for-Service Models

The term “fee-for-service” applies to mandatory, voluntary, or requested fees that a user pays for services provided by a nonprofit organization. These fees allow the organizations to generate revenue. Many nonprofits rely on fees charged for services provided to cover the direct costs of the services.

Fee-for-service models are becoming more popular as faith-based organizations and community organizations experience both decreases in funding and increases in demand for their services. Additionally, expanded competition among organizations for the same capital sources adds to the scarcity of resources.

The five types of fee-for-service models include mandatory, voluntary, or requested fees; membership programs; and hybrid approaches. You can pick and choose elements of each to create the best model for your organization. The information in the following chapter will help you identify the optimal model for your group.

Mandatory fees are predetermined prices or fixed fees charged by an organization based on specific criteria. To meet legal and IRS standards, these fees must be below the “market rate,” i.e., the amount that would be charged for similar services by a for-profit or private organization. Public universities, hospitals, and state and national parks operate under a mandatory fee model.

A voluntary donation model is when services are provided for free, but donations are requested to cover the costs. This method is a good way to introduce the concept of paying if the population you serve isn’t used to paying fees. This strategy is the least invasive, but it’s also the least effective. Without more extensive information on what the fees cover or what the services actually cost in terms of labor and supplies, people are not as compelled to give. Those who do give tend to offer small amounts.

"Requested" fees are donations requested for each service provided to make clients aware of the cost to the organization. This is a more direct method, and it usually involves a published menu of services that lists the costs of offering each service. Donations offset the expense of each service. Potential donors are given the message that their gifts can help improve services because they have a more comprehensive sense of the costs involved and what the organization can (and can’t) accomplish with their money.

Membership fees are lump-sum fees for services provided at no or low cost. For example, a small nonprofit organization may pay a fee to be a member of a regional services group through which it receives training or resources. These membership fees are sometimes on a sliding scale proportionate to the group’s operating budget. An organization with a smaller budget would pay lower fees, and fees would increase as the group’s budget grows.

Finally, a hybrid approach is a blend of the other models. It can encompass fees, voluntary donations, and even free services. For example, one U.S.-based organization of youth- and family-serving agencies employs a hybrid approach: the group charges annual membership fees, but also offers a la carte and free services. Discounted and exclusive services are available for members.