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Michael Kaiser

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The Earned Income Ratio

Posted: 10/29/2012 8:20 am

Over the years, a good deal of attention has been devoted to the earned income ratio of arts organizations -- the percentage of total revenue that comes from earned income, including ticket sales, tuitions, tour fees, parking revenue, food service revenue, etc.

When I entered the field 30 years ago, conventional wisdom suggested this ratio should be at least 50 percent, meaning at least half the revenue for an organization came from things that were sold. The remainder came from contributions. The higher the ratio, the healthier the organization, I was told, because it meant that lower levels of fundraising were required.

But even three decades ago I had serious questions about the value of this ratio. If an organization served a very poor community and had a mission to provide arts to the underserved, the earned revenue would be low since ticket prices would be low. This neither made the organization sick nor poorly managed. Conversely, those organizations with high earned income ratios were not necessarily healthy. When I joined the Alvin Ailey American Dance Theater, our earned income represented 75 percent of total revenue. Yet we were on the edge of bankruptcy. Why? Because Ailey's high earned income ratio simply meant that the organization was very poor at fundraising! The organization should have been able to raise far more which would, of course, have lowered the earned income ratio.

Over a period of years, I found that the earned income ratio has lost its place in the pantheon of useful arts management concepts and was rarely discussed by board members or arts managers. But recently, the concept is making a comeback as boards of challenged organizations place pressure on their managers to increase earned income so that fundraising targets can be reduced.

While increasing earned income streams can be extremely helpful, a naive attempt to raise the earned income ratio can be dangerous. For example, one approach to increasing earned income is to raise ticket prices more rapidly. This can certainly boost earned income relatively quickly (if the demand is substantial enough) but it can also reduce the pool of people who can afford tickets and, therefore, violate the tenets of the organization's mission and cause longer term degradation in ticket sales and contributions.

A healthier approach is to add to the number of activities that generate earned income. But, once again, any organization attempting to build a new line of business must be careful. Is special expertise required to make the new business successful? Can the organization afford this expertise? Will core activities suffer if management time is diverted to these new businesses? Can the organization afford to invest in a business large enough to take advantage of economies of scale? Are there other more experienced and better financed competitors in the same market?

Finally, the assumption that fundraising cannot grow in the current economic environment is faulty. I can name dozens of organizations that are raising far more now than they were a decade ago. When arts organizations 'give up' on fundraising, they are not maximizing every possible source of revenue. If organizations spent more time evaluating how they could build successful fundraising operations, and less time trying to find ways to avoid fundraising, they would be a lot healthier.

And the earned income ratio would become a vestigial measurement, as it deserves to be.

 
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