Five Minutes for Finance - Cost vs. Price
Understanding the Difference Between Cost and Price in Nonprofit Organizations
In the context of nonprofit organizations, the concepts of cost and price are often misunderstood or used interchangeably. However, distinguishing between the two is crucial for effective financial planning, sustainable programming, and transparent communication with stakeholders. Understanding this distinction allows nonprofit leaders to make informed decisions about budgeting, program funding, and revenue strategies.
Defining Cost and Price
Cost refers to the actual expenses incurred by a nonprofit to deliver a service or operate a program. This includes direct costs (such as salaries, supplies, and equipment) and indirect costs (such as administrative support, rent, and utilities).
Price, on the other hand, is the amount that a nonprofit charges or requests from others (e.g., clients, funders, government agencies) in exchange for its services. For many nonprofits, this may not be a traditional sales price but could take the form of sliding scale fees, suggested donations, or grant reimbursements.
Why the Difference Matters
Budgeting and Cost Recovery: Nonprofits must ensure they understand the full cost of their programs in order to secure adequate funding. Setting a price or requesting a grant amount that doesn’t cover actual costs can lead to financial shortfalls. Proper cost analysis allows organizations to seek appropriate levels of funding and avoid inadvertently subsidizing underfunded programs with unrestricted revenue.
Pricing for Services: Some nonprofits offer fee-based services (e.g., tuition, counseling, classes). In these cases, setting the right price is critical. The price must balance accessibility for clients with the organization’s need to cover its costs. Some nonprofits adopt a tiered or subsidized pricing model based on clients’ ability to pay.
Fundraising Strategy: Donors and funders increasingly want to know how their contributions will be used. Being able to articulate the cost of a program, along with how pricing structures work (if applicable), builds trust and credibility. Clear cost data also helps justify funding requests and demonstrates sound financial stewardship.
Grant and Contract Compliance: Government grants and service contracts often reimburse costs rather than pay fixed prices. Understanding and documenting actual costs ensures that nonprofits remain in compliance with funder requirements and are fully reimbursed for services rendered.
Examples
A nonprofit childcare center may calculate that the cost of providing care is $1,200 per month per child (including rent, staff salaries, supplies, and admin overhead). However, the price charged to parents may be $800, with the gap covered by grants or donations.
A museum may offer free admission (price = $0), but the cost of each visitor experience may still be $15, factoring in staff, maintenance, and exhibits. That $15 must be recovered through other revenue sources like memberships, gift shop sales, or philanthropic support.
NOTE: In some instances, a nonprofit organization may choose to set the price at a level that is higher than the cost. There are several reasons this may be a good strategy:
If an organization charges a sliding scale for its services or products, setting the highest-level prices higher than the cost is a way to subsidize the lower-level prices that are below cost.
If the nonprofit organization is providing services or products to the general public, it may choose to charge a price that is comparable to prices of similar services in the market, even though this may be greater than the cost. This increased margin (the difference between the price and the cost) could be used to subsidize other programs that are not fully funded or to contribute to the organization’s reserves.
Conclusion
Nonprofits that clearly differentiate between cost and price are better positioned to manage their finances, advocate for appropriate funding, and sustain their mission-driven work. Leaders should regularly evaluate program costs, align pricing strategies with financial goals and community needs, and communicate transparently with funders and stakeholders. By mastering this distinction, nonprofits enhance both their financial health and their impact.
About this Series
Subsequent articles in this series will cover other topics related to nonprofit financial management. Here is a list of, with links to, previous articles:
About the Author
For over 30 years, Robert Pascual has been a leader in nonprofit financial management as a CFO, consultant, conference speaker and educator. He holds an MBA from the Haas School of Business at the University of California and is the founder and principal of Robert Pascual, MBA LLC. He has worked with small, mid-size, and large nonprofit organizations spanning the fields of education, workforce development, housing, health, philanthropy, social services, media, fiscal sponsorship, nature, and the environment. Each of these organizations has faced both unique and common challenges, some of which are probably similar to ones that you wrestle with.