Value creation

This regular column explores issues civil society organisations and their funders face in assessing impact. It is not a practical 'how-to' guide - there is already much of this literature - but, rather, addresses broader themes and challenges of impact evaluation. Through these articles, we aim to share learning and promote a dialogue about how we as funders and social investors evaluate our work - how we define and measure 'success' - and, importantly, how we can most effectively support those people and organisations on the front lines in achieving our mutual objectives.

"Value, like beauty, is in the eye of the beholder."

It is the same with products and services, whether for-profit or non-profit. The value created by an organisation is determined by its stakeholders. Something can have high value for one stakeholder, and at the same time have little value for another. Therefore we have to make sure that we know our stakeholders, and what aspects of our organisation add value for them. Yet not the whole world is our stakeholder: a development programme in the Philippines may have high impact for the Philippine people, but has very little - if any - impact on people in Latin America. The latter are not stakeholders in this case. A good performance measurement system will always start with figuring out who are the organisation's stakeholders, and what value it creates for them.

But what is value? And how can we measure it?

To understand value, it is helpful to look at marketing research in the for-profit sector.

When a for-profit business develops a new product or service, they need to establish an appropriate price for it. They start by determining what target groups (i.e., stakeholders) have an interest in the new service. Then they try to find out how much these people are prepared to pay. In the literature this is known as the 'contingent valuation method'.

Here we are confronted with a major difference between for-profits and non-profits. Since non-profits (like philanthropic organisations) are not aiming to make a profit, they typically will set their sales price as close to the cost price as possible. They are not looking at the value of the service, but at the cost price. For-profits, in contrast, tend to seek the maximum price people are willing to pay. So their research targets the customer's 'perceived value', and they will set their prices as close to this perceived value as possible.

By taking these different approaches, non-profit pricing will always reflect costs; and for-profit pricing will reflect value - that is, the perceived value for the customer, their major stakeholder.

For example: a nice pair of Nike shoes costs only a few dollars, pounds or euros to manufacture. But the sales price can be over $100. Why? Because when Nike interviewed their stakeholders - young people who want to have a good, trendy image to show off - they found that young people are willing to pay for this image. And the perceived value of this image is worth $100!

So can we monetize image? Yes!

Now let's look at a philanthropic organization that is creating awareness about, say, poverty, or social cohesion, or employment, or higher self esteem. Can we monetize these issues? Not if we focus only on cost price. Almost invariably, the cost price will give us the totally wrong perception of the value we create.

If we are changing people's lives, then we are changing concrete issues: change in behavior, change in attitude, change in income. And, yes, we can measure the value of all these changes, as long as we understand that we are not only measuring 'costs saved'. Moreover, we need to research and measure the value created - the perceived value for the customer. But how do we do that? Just as Nike, or any other for-profit, does it: by asking stakeholders what their perceived value is.

Of course, it is not always simple. You cannot just go to someone, tell him you changed his level of self-esteem and ask him how much he is willing to pay for it. But there are ways. For example, there is the Price-meter-method, widely used in marketing research. First you define what exactly it is that you are changing in someone's life or behavior (the 'theory of change'). Then you start asking questions about what they think is a far-too high price for this. And what would really be too cheap. Because if it is too cheap, then it probably has no value.

Next you ask the stakeholder when is the service 'acceptable-expensive' and 'acceptable-cheap'. Between these two levels you can define the (perceived) value created by your service or product. In for-profit marketing this is the level of the sales price; for non-profits it is a good proxy of the value created.

Now we know the perceived value. But can we cash it, like Nike? No, not always. But it depends…things can have value without cash flows taking place!

If we can demonstrate the value we are creating, then people may be more willing to donate, or to donate more. But if we continue to showing only our costs, then people will continue to view us as only a cost-centre.

But we are creating value; we just have to show it!

Peter Scholten is the co-founder of Scholten&Franssen, a European-based consultancy specialising in performance measurement tools and in assessing an organisation's social and environmental impact. He is a founder of the European Social Return on Investment Network and an advisor to the department for Social Venturing at Nyenrode Businesschool. This year, Peter is ranked among the 20 most influential players in the Dutch non-profit sector. He can be contacted at peter@scholtenfranssen.nl.

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