Helping Those Who Help Others

The Revenue Matrix Tool

This memo outlines the major steps that would be used in helping a nonprofit achieve an adequate and sustainable revenue model. The first step is for a nonprofit is to identify, evaluate and rank a range of revenue sources that could potentially be included in its model. To help in that process, we make use of a tool and process we developed - the Revenue Matrix.

A. Background on the Tool

The Revenue Matrix tool was developed from the initial work of Jon Pratt, Executive Director of the Minnesota Council on Nonprofits. He originated a tool by which an organization could evaluate its financial situation on the basis of the reliability and autonomy of its current funding sources.

We expanded the basic concept behind the tool by adding in potential new revenue sources (not just an organization's current ones) and by adding additional evaluative criteria. The ultimate goal of the revenue matrix tool and process is to devise a revenue model for an organization that is strong, diverse, and sustainable.

B. Steps in the Process

The following describes the six steps involved in applying the matrix tool to a nonprofit. In general, the steps involve selecting criteria by which each revenue source will be evaluated, defining a "universe" of potential sources, rating each of the sources against the criteria, researching those with the most potential, and devising and implementing the final model.

We recommend to the nonprofit that a "Project Team" be selected that would consist of board representatives and key staff. The Team will meet periodically over several months to monitor this project and provide key stakeholder input.

Step 1. Select the evaluative criteria. The first step is to select the criteria by which each of the potential revenue sources for a nonprofit will be evaluated. Examples of possible criteria include the following (in alphabetical order).

Ability to withdraw: ceasing this revenue source at some future date will not impair the nonprofit's operations
Fairness: the burden of the revenue source is allocated in a fair and appropriate manner on the payers of the revenues
Flexibility: the nonprofit has control over how the revenues can be used
Infrastructure: employing this revenue source does not require major additions to the nonprofit's infrastructure
Mission: the revenue source is aligned with the mission and values of the nonprofit
Political acceptability: the revenue source will be acceptable to key stakeholders
Potential: there is reasonable expectation of significant revenue growth over time from this source
Reliability: the revenue source is generally predictable and consistent
Return on investment: the revenue source will produce significant revenues above the cost of generating those revenues
Visibility: the revenue source raises visibility and goodwill toward the nonprofit in the community and among its stakeholders

These criteria originated with various former clients. The Project Team is free to use any of these or to select others.

Typically our clients choose 4-7 criteria to use in evaluating the revenue sources, but any number can be used. The matrix tool also permits the Project Team to weight some of the evaluative factors as more important than others. How this weighting is applied is described below.

Step 2. Compile the starting universe of revenue sources. In this second step a starting "universe" of revenue sources is compiled. In this early stage of the Matrix development, it is important to have a broad menu of options. For a nonprofit's starting universe, we begin with its current major revenue sources, its own ideas for possible new sources, ideas obtained from organizations similar to the nonprofit, and from our prior research.

The starting universe. will vary with each organization, and we typically develop the initial draft. We recommend that organizations begin with a starting universe of at least 20 revenue sources. The starting universe is typically divided into four general source categories:

Contributed
Public/governmental
Membership
Earned
Quasi-equity
Miscellaneous

In the remaining four stages of the tool process, the goal is to reduce the starting universe to a manageable number of individual revenue sources that together will make up the final revenue model for the nonprofit. In later stages of research we may find additional revenue sources that could be added, so this initial universe is just that - a starting point for analysis.

Step 3. Score the initial revenue sources. In this third step, each revenue source in the starting universe is scored for each of the evaluative criterion as:

+2	(very positive in respect to that criterion
+1	(positive)
0	(neutral or "don't know")
-1	(negative
-2	(very negative)

As mentioned above, the revenue matrix tool can accommodate a decision by the Team that some of the factors are more important than others. From our experience, most nonprofits will believe that some factors are valued more highly than some other factors selected by the team. The spreadsheet formulas are modified to reflect any weighting decisions.

At a Project Team meeting - typically lasting three hours - the Team works through the scoring on a consensus basis. The Team will decide whether to score all of the revenue sources in the starting universe.

Some of the potential new revenue sources will likely be unfamiliar to team members, and for those a "don't know" or "0" is perfectly acceptable scoring.

We emphasize that although this scoring system will be helpful for a nonprofit, the initial scores and ranks are guidance only and should not be considered an absolute measure of the value of revenue sources. More analytical work is needed before any final commitments are made by a nonprofit to pursue or to drop any revenue sources.

Step 4. Research selected remaining revenue sources. The next step in the process is additional research and analysis. This work is particularly important for revenue sources that score relatively high but for which there were many "don't knows" in the scoring. Typically these are new revenue sources that a nonprofit has never used but that appear to be intriguing. Conversely, it is usually not necessary to do much if any research on its current well-established revenue streams.

The Project Team will select a number of the higher-scoring revenue sources for more detailed analysis. This additional research should:

examine experiences of organizations comparable to the nonprofit,
identify grantmakers or other funders who might be interested in this revenue idea for you, and
estimate the costs of generating the revenue from this source.

Regarding the last point, it is important to understand that every new revenue source will require an expenditure of some resources to generate those dollars. Examples of what we mean include

A "Friends of" organization would require a membership services coordinator, software to track dues paid, and materials preparation and mailing costs.
Generating certain new government contracts will require monitoring procedures and conformance to governmental accounting practices.
Implementing an earned income strategy will require an organizational culture that is entrepreneurial, and that may in turn require staffing changes.

For some new revenue sources a full-bore business plan may be desirable. This is particularly true for any new earned income venture. We at Triplett Consulting usually do not undertake this business planning ourselves, but we help the nonprofit identify those who can.

Step 5. Select the revenue sources for inclusion in the revenue model. After examining the results of the research, the Team will then select the revenue sources to be included in its final revenue model. After beginning with the original revenue universe, the final revenue model will likely be reduced to less than 10 final revenue sources.

Once the Project Team identifies the revenue sources to be included, each of the revenue categories will be assigned a specific portion of the total revenues. For example, a nonprofit may end up with a balance of contributed income (20%), public (50%), earned income (25%) and miscellaneous (5%).

Step 6. Construct a phase-in schedule. Because it will take time to fully engage new revenue sources, we recommend a multi-year transition to the new revenue model. Typically we recommend a 3-5 year implementation schedule with most of the new sources scheduled for implementation after a 1-2 year development period.

After examining the results of the research, the Team will then select the revenue sources to be included in its final revenue model. After beginning with the original revenue universe, the final revenue model will likely be reduced to less than 10 final revenue sources.

The spreadsheet templates used in the revenue matrix tool are copyrighted by Triplett Consulting LLC, but we want to make them available to anyone who wants to use the tool to strengthen their own nonprofit. Please contact us if you would like a version of the materials.