Greetings from sunny San Diego where today we kicked off the inaugural OPEN MINDS California Planning & Performance Management Institute! We’ve had an exciting day with an incredible faculty and a great group of sponsors. This afternoon my colleague Joseph P. Naughton-Travers, Ed.M. led a discussion on revenue diversification and new service line development – Strategies For Revenue Diversification: Considerations In Moving Beyond Cost-Reimbursement Services.
Diversification is an issue that looms large for the management teams of many provider organizations. Most organizations in the field have an unhealthy reliance on one payer – or one consumer group. This is a strategic vulnerability if that one payer changes policies or reimbursement rates (or consumer preferences change). To be successful in the long run, management teams should be thinking about the balance of their service line portfolio – and consider new payers, new consumers, and new services as options for diversification.
When it comes to assessing how to move forward with a change or expansion into a new service line or program, Joe pointed out that there are really only two things that matter:
- Market Research
Joe illustrated this point with an example of a client, a children’s services provider organization, that built a fantastic new day care center – a state of the art facility with ideal staff-to-child ratios and a great variety of programs. The only problem? This fabulous facility charged $400 per week per child – a price that consumers were not willing to pay. Where did they go wrong?
The Market Research – Before you can move forward with a new service line, you must consider the market in which you’re operating. It is important to secure the necessary perspectives and understanding of potential customers, contributors, and funders through market research. Consider: Who are the consumers you will serve? Do they want the service you’re offering? Who are the big competitors in the area? How much do those competitors charge, and what are the benefits of their services? How much are consumers willing to pay for the service?
In the case of our children’s services organization, they didn’t consider their competitors, or the price that consumers are willing to pay for the service. If they had done their research, they would have realized that other day care centers didn’t charge half that much, and that parents were happy with their service.
The Math – The second point to consider before jumping into a new service is the financial aspect. Its important to conduct a feasibility analysis with financial forecasting to confirm that the return will justify the investment (See Thinking New Service? You Need 2 Tools and What New Service Is The Right New Service?).
For our children’s services organization, the math clearly showed that building a brand new facility, with the level of staff and programs they designed, required them to charge a fee that was out of range of most of their consumers.
So what lessons can we take from our children’s service provider organization and their investment in a day care center? One, revenue diversification is important. But, just because something is new, it doesn’t mean its right for your organization. Two, research and planning is essential to making a new service line work. If you stick to the two M’s – the market research and the math – you can be assured that your organization is on the right path to finding the right new service line investment.
Stay tuned tomorrow for more from the California Planning & Performance Management Institute. In the meantime, if you couldn’t join us here in San Diego, follow our live updates on Twitter @openmindscircle #OMCA, or our Facebook page, https://www.facebook.com/openmindscircle.