Business Models

To Close Or Not To Close, How Much Debt Is Too Much?

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A little over a week ago I received the news that one of our partner theatres decided to close its doors. That sent the rest of us scrambling to contact artists to see if we could salvage the tours with which the organization was involved.

The board has said they want to revise their business plan and perhaps reopen in 2013. In the meantime, come this Friday, the entire staff is out of a job. I am wondering if they will be able to resolve all their grants and settle other business in that time.

A conversation I had about their closing has had me thinking over the last week. When I read the news about their closing, I was somewhat relieved to learn the organization was $200,000 in debt. Given the debt amounts you usually see associated with failing arts organizations, this is relatively small. Though it is also more significant for their $1 million annual budget than for those with $10 million budgets.

Referencing this debt, a colleague asked if they couldn’t have simply gotten a line of credit from a bank to enable them to stay open. This got me thinking about how you determine when it is time to cease operations.

Given that they intend to revise their business plan and hope to restart operations, would it have been better to attempt a reorganization through the next season rather than lose momentum with their community and funders by closing?

Or given that their debt is about 20% of their operating budget, did they do the responsible thing by deciding to close in the face of what I assume to be dwindling attendance and fundraising prospects? Why saddle your new business plan with the burden of another year’s accumulated debt?

In the last couple weeks I read an article/blog post that criticizes a non profit board of a YMCA for being oblivious to the state of their failing organization. The article suggested the board should have seen the warning signs had they been paying attention to the financials.

Our partners were clearly paying attention and decided to do what they felt was the responsible course of action. There isn’t really any clear cut formula which dictates that you should close your business when your debt reaches a certain ratio of your budget because there are so many situational variables each organization faces. What one company can recover from may mark the start of a downward spiral for another.

I am curious to know at what point people think organizations need to close. Does seeing other non-profits rack up huge debts before closing or declaring bankruptcy inure us and make organizations more apt to keep operating under the assumption they haven’t reached that point of no return yet?

Right People, Not Right Product Make A Great Company

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So as something of a follow up to my post earlier this week asking if foundation boards embrace non-profit values, I wanted to point to an article about what private enterprises can learn from non-profits.

The five points the article emphasizes are connecting with the community, understanding what motivates your employees, creating long term value, valuing people over the program or product and improvising.

Many of these points are representative of what the arts can bring to private businesses. While I don’t think the arts are exemplary in the diversity of employees and audiences it serves, improving that situation is a major topic of conversation and can help lead others to the questions they should be asking about themselves.

Likewise, while it may seem that non-profits don’t have a sterling record in respect to overworking employees, they do understand what motivates people to dedicate themselves to a cause in return for little material reward.

Lately one subject that seems to come up frequently is the idea that private companies have an unhealthy focus on short term gains at the expense of creating long term value. Many companies are starting to see that focusing on corporate social responsibility (CSR) is crucial for doing business.

It almost seems that if the non-profit sector can come up with an effective program to engender even a partial shift toward a longer view, a great service will be rendered.

The one point I especially liked in the article was that great people have more value to a company than great products and services. I think it can be easy to forget that when you are being evaluated based on the numbers you achieve (which is especially the case for non-profits’ administrative cost ratios)

4. The right people (not the right product or program) make for a great organization (Chris Pullenayagem, Director, Christian Reformed Church)

Many private (for profit) organizations rely on products or processes or programs to be successful in their business. For those that do, this seems to be an inverted way of pursuing excellence. People bring vision, passion and creativity to their work as evidenced in non-profit organizations. If the right people are hired, every organization will move towards excellence in achieving its vision and what it was mandated to do. Any organization can show results, but only this type of organization will thrive with excellence.

Stuff To Ponder: Is Too Much Money Being Left On The Table?

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Though I have written about dynamic pricing, I have generally been a little resistant to the idea of implementing that sort of pricing because I feel having a clear and simple pricing is part of an arts organization’s relationship with a community. Or rather, having a complicated one can be a barrier to attendance and also generate a negative association with the organization.

But I have been reading some things recently that make me wonder about that.

JCPenny’s attempt to sell everything at an everyday low price that reflects the value of the product has apparently backfired on them.

According to a piece on MSNBC’s website:

Consumers complain about this constantly. That’s the basis of the Red Tape Chronicles in fact. At its best, the maddening mixture of coupons, rebates, sales and fine print fees can feel like a game. At worst, it’s being cheated. You’d think shoppers would love a chance to buy from a store that doesn’t play these games, the way car buyers (allegedly) like shopping at no-haggle auto dealerships.

[…]

To oversimplify for a moment, here’s Penney’s problem. They told the world that retailers only offer their best prices during crazy sales, and Penney stores would no longer host them. Sensible consumers apparently took that information to heart and decided to simply wait for such sales at other stores. As an added benefit, Penney lowered consumers’ search costs, because they now knew they didn’t need to bother driving to a Penney’s store anymore.

[…]

Shrouding isn’t the only reason Penney’s pricing plan is flawed. The firm is also leaving a lot of money on the table by rejecting a phenomenon known as “price discrimination.” Some people have more money than time, and some have more time than money. Some shoppers don’t mind spending hours to save $20; others would gladly give a store $20 to escape quickly. Smart retailers get money from both. By killing couponing, Penney has eliminated its ability to satisfy price discriminators.

And as others have pointed out, markdowns serve the age-old retailing trick of “anchoring.” For some reason, even very smart consumers feel better paying $60 for something if you initially tell them it costs $100, and then reduce the price.

Right around the same time this article came out, Colleen Dilenschneider on the Know Your Own Bone blog wrote about why offering discounts through services like Groupon is a bad idea for non-profits. The two reasons she gave?

“1) Your community expects more discounts, 2) Perhaps more importantly, your community waits for discounts”

Since MSNBC pretty much confirms what Colleen claims, I started to wonder if maybe arts organizations are fools not to double the prices and then offer 50% off coupons through social media.

Yeah, I know it is cynical and believe me, I still don’t want to get into doing anything resembling this. But I do everyone a disservice if I don’t explore the option.

Are arts organizations being responsible if they leave money on the table by not recognizing some people will pay more for the privilege of getting the transaction over quickly? If you effectively charge what you perceive to be the true value of your product by doubling the price in order to take advantage of consumer inability to pass up a 50% off coupon, are you really cheating your audience? (In other words, intend to sell tickets at $25 by pricing them at $50 and then flooding the market with half off coupons.)

One thing of course, I need to point out is that price does not develop loyalty. You can not develop a relationship with your community if interactions with your organization are based on price. I stated that in the early days of this blog and as Dilenschneider notes this is true even in these days of social media:

“It is far better for your brand and bottom line to have 100 fans who share and interact with your content to create a meaningful relationship, than to have 1,000 fans who never share your message and liked you just for the discount.”

Dilenschneider also points to some data that there are diminishing returns from social media discounts. This may illustrate be where arts organizations and retailers differ. Retailers can offer myriad discounts annually and not suffer, but arts and cultural organizations offer a product valued entirely differently from that of retailers

But lets assume that the current discounting model doesn’t work well for non-profits because it is really designed for the needs of retailers and that a discount offered in an alternative manner might prove more effective. Should we be researching alternative discount structures in order to more effectively generate revenue given that the future of donations and grants looks precarious?

Questions like this get into the core philosophy about the organization’s existence. Is the purpose to preserve and perpetuate the organization so it can continue to do good work? Or was the focus on providing the art in an affordable manner and the inability to do so is a sign that the organization should transition toward closure?

Still More On Crowdfunding Start Up Arts Orgs

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If you have been reading my blog regularly over the last few months, you know I have been keeping an eye on the possibility of the crowd funding elements of the recently passed JOBS Act replacing non profit status as a viable method of creating and sustaining an arts organization.

If you haven’t been reading that long, well harken back to my original musings on the subject as well as some more recent musings with links to information on the implications of the law as passed.

Hat tip to Charity Lawyer Blog’s Ellis Carter (whom I have previously incorrectly identified as male. Sorry about that Ellis) for her link to a piece on Startup Company Law Blog about the problems with the law.

Author Joe Wallin confirms many of the general suspicions I had about the costs of compliance probably being overly burdensome given the $1 million limit.

One thing that surprised me was that the law actually prohibits start ups from the “do it yourself” approach which I have always assumed to be a hallmark of start ups.

3) The Law Forces Companies To Use Intermediaries

The law forces startups to use intermediaries to raise the funds. This is fundamentally different from what typically happens with startups. Most startups raise funds without the help of intermediaries. In fact, this is the prevailing norm for startup companies. The typical advice to a startup is–don’t use an intermediary! Founders, do it yourself!

 But here the law forces companies into the arms of either registered broker-dealers or registered funding portals. These entities are subject to numerous requirements, and their compliance with those requirements will make the process much more difficult and costly for companies.

Maybe arts organizations with their bare bones mentality about providing a product might make it work within the restriction, but the whole point of pursuing an alternative to the non profit business model is to adopt an alternative approach and mindset about providing cultural experiences. (a.k.a. ramen isn’t a default food group for artists.) Though it will probably bring it own attendant problems, success might be measured by how diversely arts and cultural organizations manifest after phasing away from non-profit status.

At the end of his post, Wallin suggests Congress go back and make some changes to the law to allow start ups to proliferate more easily. I am sure there is still plenty of opportunity for successful crowd funded start ups within the law. If it isn’t changed before that, perhaps the successes will lend credence to the idea this can be a viable path for entrepreneurs, moreso with a few changes.