The Liberal Democrats must become a "fully-fledged party of government" or risk being condemned to irrelevance and "slow decline", Nick Clegg warned.
The Deputy Prime Minister said the Lib Dems were at a "very real fork in the road" and had to choose whether to embrace their position in power or retreat to the "comfort blanket of opposition".
As part of the new approach to the way the party operates, the next Liberal Democrat election manifesto will spell out the party's red lines for any coalition negotiations, Mr Clegg indicated.
The document will be a starting point for talks with political rivals, and Mr Clegg warned activists that they should not expect to implement everything in it. The prospectus will clearly show the commitments that the Lib Dems would "die in a ditch" to keep in a power-sharing deal, aides to Mr Clegg said.
The Deputy Prime Minister acknowledged that the party's pledge to scrap tuition fees had been a "mistake" because it could not be delivered in coalition but the next manifesto, drawn up by Cabinet Office Minister David Laws, would be a "to-do list, not a flight of fancy".
In a keynote speech Mr Clegg acknowledged the Lib Dems had "taken a hit" following the decision to enter coalition with the Conservatives in 2010, but he insisted the party had to position itself as a party of government.
"We cannot fake this choice. We can't nod and agree and say how important it is - only to then carry on as normal," he said.
"Our party needs to make some big changes to the way we do things. The way we deploy our message; how we design our policies."
In a speech to the party's councillors in Manchester, he said: "Let's just be absolutely clear on the alternative. Governing has carried a cost. We have taken a hit; our opponents try to use the fact we are in government nationally against us locally."
"But if we try and turn back the clock, hankering for the comfort blanket of national opposition, seeking to airbrush out the difficult decisions we have had to take, we condemn our party to the worst possible fate: irrelevance; impotence; slow decline".