Resource and Revenue Management in Nonprofit Operations

By Francis de Vericourt and Miguel Sousa Lobo

Nonprofit firms sometimes engage in for-profit activities with the sole purpose of generating revenue to subsidize their mission activities. The organization is then confronted with a consumption vs. investment trade-off. Investment corresponds to the allocation of capacity for revenue customers, while consumption corresponds to serving mission customers. We model this problem as a multi-period stochastic dynamic program. In each period, the organization must decide how much of the current assets should be invested in revenue-customer service capacity, and at what price the service should be sold. We provide sufficient conditions under which the optimal capacity allocation and pricing decisions are of threshold type. Similar results are derived when the selling price is fixed but banking of assets is allowed. We compare the performance of the optimal threshold policies with heuristics that may be more appealing to managers of non-profit organizations. Numerical experiments indicate that, while banking appears to only have a marginal effect, dynamic pricing can provide a significant benefit.

Operations Research  57(5): 1114 – 1128, 2009