Higher industry costs + lower industry revenues = potentially big industry problems
If it seems like you’re hearing more and more about the importance of long-term solvency of visitor-serving organizations, it’s likely for good reason. Data suggest that the costs of running a cultural organization are escalating at a greater rate than are the revenues that these organizations are earning.
That is the topic of this week’s Know Your Own Bone Fast Facts Video:
IMPACTS tracks 224 visitor-serving organizations in the United States. This includes museums, zoos, aquariums, performing arts organizations, and botanic gardens, for instance. We have been tracking the operating expenses and earned revenues for 41 client and their respective comparative set organizations for the last seven years. Between years 2010 and 2016, average per capita operating expenses increased 27.1% while per capita revenues increased by only 17.3%.
Nerd alert: The data is indicated in index values, which are a way of assigning proportionality around a mean. The way that we derive these changes is by standardizing all of the organizations’ per capita revenues and expenses to a value of 100. This allows us to measure organizations against one another, even though they have different per capita revenue and expense numbers depending on their size, etc.
Needless to say, this is not a happy finding. But it’s an important one.
In a nutshell, things aren’t looking great for the typical visitor-serving business model.
Cut costs or increase revenues?
There are generally two, broad ways to help alleviate the problem, and they aren’t mutually exclusive: Cut expenses and/or increase revenues. A problem may be that these two options have their own challenges contributing to revenues not keeping pace with expenses in the first place.
On the “just increase revenues” end of the spectrum is the fact that people who profile as traditional visitors to cultural organizations are leaving the market at a faster rate than they are being replaced (a phenomenon that we at IMPACTS call the “negative substitution of the historic visitor”). This means that if entities do not do a better job of attracting more diverse visitors, then attendance will likely continue to decrease over time. Instead, cultural organizations are doing an increasingly good job of attracting those who already profile as traditional visitors. Attracting even these same audiences may be more expensive thanks to expectations regarding technology and ongoing digital engagement.
And reaching new audiences means greater investments in programs, initiatives, and a culture of inclusion. It’s an investment.
The “just cut costs” approach seems to be a staple of the nonprofit industry, and cultural organizations may be no exception. At a certain point, it’s difficult to cut expenses without negative implications.
Cutting marketing budgets, specifically, is often one of the first lines of defense. As it turns out, it’s a really dumb one. Provided an organization has a competent marketing department, cutting this budget means cutting awareness of an organization – and this results in lower attendance. Tickets to cultural organizations are not bought, they are sold. Not only that, after an organization loses guests as the result of a marketing budget cut, they often need to spend more to buy back their lost audience.
On top of all this, data indicate that some of the “surefire” approaches to increase revenues – like building expansions or blockbuster exhibits are not long-term solutions or “surefire” approaches at all.
It may be time to think outside of the business box.
Or, perhaps better said: It may be time to think outside of the business ivory tower and challenge what we’ve come to regard as a “best practice” within the visitor-serving industry.
Here are three opportunities that may be worthy of some strategic thinking with regard to revenue. They may sound simplistic. (Indeed, they are in the context of this short article.) They are starting points for deeper dives and bigger conversations. In fact, you may have noticed that I have been increasingly delving into these three areas on Know Your Own Bone! You may also have noticed others increasingly speaking out about these topics.
1) Examining funding models
First, it’s time to take a hard look at funding models. This includes making sure that an organization is charging its optimal admission price. Finding this optimal price point is a data-informed science, not an art. It includes having a better understanding of access and how certain audiences obtain entry to an organization.
Let’s be clear: Admission price is not an affordable access program. Being intelligent about this has nothing to do with shutting the door on income-qualified audiences. Free admission organizations generally welcome audiences with the same average household income as those that charge admission, and being free is not a cure-all for engagement. There are other ways to engage these audiences than free admission for all, and it may be time to get smarter about this.
For organizations that are able to offer free admission, this means taking a look at funding sources and working to ensure that these sources are keeping pace with escalating expenses – if not exceeding them.
2) Diversifying revenues
This is not a new “solution” by any stretch of the imagination. That said, it may be more important than ever to intelligently target potential donors, and optimize – or perhaps revolutionize – membership opportunities.
Indeed, an important element in increasing industry solvency may involve thinking about membership programs. Traditionally, there may be a belief that transaction-based benefits such as member-only events or store discounts are the most important aspects of membership. Mission-based members are more valuable than transaction-based members. Moreover, membership has been a bit synonymous with a kind of “local audience discount” for some organizations. This may require some additional thinking, as non-local members can be very valuable. Revolutionizing strategies may be particularly helpful in this arena – as well as in areas related to fundraising.
3) Putting guests first by integrating audience trends
Finally, let’s examine engagement strategies and make sure that we are integrating critical trends to reach new audiences, instead of simply adding on one-off programs and losing opportunities to change up the “type” of person who visits a cultural organization.
“Putting guests first” may sound silly. Haven’t we always done that? Well, no. Not necessarily. In many cases, organizations have operated from the inside-out – with internal experts making major decisions with little regard for audience preferences or behaviors. Indeed, some types of entities aren’t considered unwelcoming for nothing! Operating from the outside-in, with consideration to how attendees think and behave, may allow organizations to make decisions that are more likely to motivate visitation, engagement, and support.
Diversity and inclusion, for example, aren’t just warm fuzzies. They are important business-related topics that leaders ignore at their own risk.
The kind of changes that the industry needs to make may involve long-term strategic design more than tactical quick thinking. In other words, the solution to this issue isn’t necessarily, “Just get bigger donors using the same methods that we always have!” It’s something more sustainable. Or rather, it’s a whole series of decisions to become more sustainable.
Being in the red might may seem oddly tenable for now – especially for organizations with larger endowments – but this isn’t likely to be tenable forever. At some point, endowments stand to run out unless new methods are uncovered to replenish them.
It’s tempting to see the trend and think, “We’re just going through a rough patch,” but there’s reason to believe that things need to shake up in a big way. Simply put, cultural organizations may need to get better at doing business.
This doesn’t need to be done in order to serve only traditional visitors to cultural organizations. It needs to be done in order to grow our audiences overall in intelligent ways that keep our doors open.
The cultural industry is in desperate need of a business change so that we may not only exist, but better serve our missions.