View PDF- (Originally appeared in FORUM- April 2018)
By E. Ruth White
The American Dental Association (ADA) is looking to shift its revenue model from being predominantly driven by dues revenue to a model wherein a majority of its annual operating budget is supported by non-dues revenue. Sound familiar? If you work for an association, it probably does, since increasing non-dues revenue is among the most important priorities for any organization looking to stay relevant and sustainable.
Historically for the ADA, the split between dues and non-dues revenue has been close to 50/50, but since the implementation of its strategic plan, Members 2020, the share of non-dues revenue has risen to about 56 percent as of 2017, with the ultimate goal being to raise that number to 65 percent. The strategy is to minimize raising membership fees, since higher fees tend to discourage membership growth. The ADA needs to generate an additional three to four percent annually just to cover costs from increases in existing salaries, benefits and basic overhead.
Like many associations, the ADA struggles with silos, limited resources and identifying the next wave of emerging market needs that could lead to filling the non-dues revenue pipeline with innovative and highly profitable products or services. Bottom line: Where should the ADA be investing resources for maximum results? To get the association moving in the right direction, ADA executive director Kathleen O’Loughlin, DMD, did two things: She created a hand-selected, cross-divisional non-dues revenue strategy team (Workgroup), and she turned to outside help.
For the Workgroup, the executive director bypassed the traditional senior management group and created a team of employees who “work in the trenches” generating non-dues revenue. Titles ranged from VPs to managers, and she made it clear that all participants sitting at the table were equal.
To break down silos, she set a directive of creating an association-wide, non-dues revenue pricing strategy that could generate an additional four to six percent annually. She indicated she did not believe the solution would come from creating more products and services to sell to existing members; the ADA already has a robust line of products and services. She set deadlines of evaluating 2017 programs, improving profitability of the existing 2018 operating budget and creating a 2019 budget that met the revenue growth target. Then, after appointing a team leader, she stepped out of the day-to-day process of the Workgroup.
For outside help, the ADA turned to a consultant group with experience in enabling associations in non-dues revenue growth. The consulting firm was hired to evaluate the current marketing resources and ascertain whether the existing structure was generating maximum ROI. The ADA has an integrated marketing and communications division but also has separate, dedicated departmental and/or product marketing and sales resources (both in staff and budget dollars). Would the ADA generate more revenue by centralizing all functions? The second half of the consulting project was to identify innovative ways to grow revenue.
The Workgroup developed a charter, set deadlines and created subgroups to address specific issues: financial analysis, sales and marketing, pricing strategy, customer voice, product evaluation, innovation and cross-divisional product efficiencies. Moving forward in this manner successfully created buy-in and split workloads. However, this method also required numerous planning meetings, which put the Workgroup behind schedule.
Cost Allocation and Financial Analysis
The financial analysis team set about identifying non-dues revenue sources and how to fully load costs to evaluate profitability. The ADA has always matched direct product-
development expenses (i.e., cost of goods) and included staff salaries and benefits in department budgets. The hole in the picture was overhead expenses and, more importantly, cross-divisional resources used to create products that were not allocated back to the department developing and selling the products.
For example, a patient education brochure developed and sold by the Product Development and Sales department has its content edited by someone in the Science Institute, is printed through production services in the Division of Integrated Marketing and Communications, is sold through an e-commerce website maintained by the Division of Information Technology and has customer sales questions answered by call center staff in the Member Service Center under the Division of Member and Client Services. If Product Development and Sales was its own company it would have to pay for all these services, but it could also choose who provided these services.
The main challenges the financial analysis team faced included determining how granular to get; whether to use FTEs (head count) vs. percentages to calculate costs; meeting immediate needs for information vs. building a long-term budget process; and doing the cost allocation for the entire organization vs. just the non-dues revenue areas.
The first decision was not to get too granular as the goal was to create overarching strategies for day-to-day decision making. The group didn’t want to fall into the trap of creating “data for data’s sake,” so instead, it identified the top product lines. For example, instead of fully loading costs into every single patient education brochure, the analysis would be done on the patient education product line.
For allocating general overhead costs, using a mathematical formula based on FTE of each department made sense. The ADA had already done this for certain areas that worked in conjunction with outside organizations that required transparency and justification of shared costs.
The true challenge was cross-divisional cost allocations. In determining the route to go, balancing the need for immediate information vs. being able to replicate the process consistently and provide monthly updates on expenses came into play. As the ADA was in the middle of converting to a new finance system, it was able to tap into some available consulting dollars to build a semi-automated solution. Annually the various cost centers would allocate a percentage of their budgeted expenses to the appropriate revenue center based on work they were doing on behalf of the various products. The finance department would facilitate these allocations, seek approval for the expenses from the revenue centers and input the appropriate percentage allocations into the finance system. At this time, the ADA has opted not to change it current budget processes and reporting tools. The new reports will be used as separate strategy tools for supporting pricing decisions, product resource allocations and sunsetting products. Dependent on the value of fully loading costs to meet its revenue objectives, the ADA might eventually rework its entire budgetary process and reports.
With feedback from the Workgroup, the financial analysis team decided that the cost allocations should be done for the entire organization, and not just the non-dues revenue areas. This was simpler for the Finance Division and would clearly delineate the expense of member benefits vs. the costs of creating salable products.
The pricing strategy team immediately decided that one size cannot fit all and a single overarching strategy would not work. A review of past pricing decisions demonstrated that some areas had increased fees to offset inflation, some areas were limited in their ability to increase fees and that traditional types of non-dues revenue like advertising depended heavily on markets that are becoming more price competitive. Future pricing considerations needed to consider the target audience, a market assessment (product maturity, obsolescence, competition or substitutes offered by new technology), cost to provide the product, value to ADA other than revenue and governance. The outcome was a decision tree for the business units to use. (See figure above.)
Marketing, Sales and Innovation
While the cost analytics and pricing strategies were being developed, the marketing and sales team got to work with the consultants, conducting numerous interviews with the revenue-generating areas and the Division of Integrated Marketing and Communication Division. Based on their review, they identified that the ADA had a diverse portfolio of products across different customer segments and that the non-dues sales and marketing efforts were fragmented.
As a result, the ADA was generating a high volume of communications to customers, shared marketing services were overextended and there was no consensus on priorities, leading to dissatisfaction. They proposed that the building blocks for success needed to combine sales enablement and marketing, branding, sales management and support functions like legal, IT and finance. The ADA should develop either a function and product matrix model that would allow it to resource sales and marketing specialists across products—or a function and customer matrix model that would allow it to develop targeted product portfolios to different customer segments. The ADA is continuing to explore how to implement a matrix model into their day-to-day operations that has a high level of scalability for revenue growth, standardization of processes and integration between functions for ease of hand-off between sales strategies and sales enablement.
Per consultant project scope, the ADA received a list of areas in which it might expand its product portfolio.
The customer voice team set out to address the challenge of building an adaptable framework into the non-dues revenue business model that would continually monitor and incorporate customer voice into the product growth and lifecycle, capitalize on moments of truth in ways that satisfy customer needs and deliver a consistent and positive experience across platforms. The proposed strategy was to view the product portfolios through the lens of the customer type (dentists and dental team, industry customers, testing services and education), benchmark and track programs and incorporate customer voice on an ongoing basis for continuous improvement.
In the past, with a focus on the value as a member benefit, the ADA used various methods to track member satisfaction: member value and loyalty studies, Kantar Study, Decision Lens, McKinley Advisors and consulting companies like Frog. These methodologies didn’t provide day-to-day, real-time decision-making guidance and were difficult to correlate with how to grow non-dues revenue by the different customer types. They did, however, provide a baseline for evaluating the various products and services. From that baseline, product managers and data analyzers could tap into the ADA’s CRM data warehouse of customer sales and engagement, review monthly financial reports, engage in online and exit surveys, and utilize the ADA’s Advisory Circle and Clinical Evaluators Panel to constantly evaluate customer satisfaction and incorporate the customer voice into product development and sales.
The Non-Dues Revenue Workgroup has identified numerous strategies and tactics to move the ADA toward its revenue objectives, but there is still much work to be done. With the 2017 financial books closed, product lines can be evaluated for profitability by matching revenues with fully loaded costs. With this as a benchmark and a list of potential ways to expand the ADA product portfolio, the Product Evaluation, Innovation and Cross Divisional Product Efficiency teams can review the 2018 product lines budgets and recommend where to focus resources for maximum revenue growth.
- Ruth White is the senior manager, special accounts and licensing, Department of Product Development and Sales for the American Dental Association. She can be reached at firstname.lastname@example.org.