Defining and measuring customer value in the social sector
Customer value is any business’ sole reason for existence and the centrepiece of a business model. I wrote about its importance before in the business modelling series, focusing on how to build customer fulfilment into the business model of a social organisation. Since publishing that article, I realised just how little is available out there about what customer value is in the social context. Turns out, I inadvertently put the cart in front of the horse by focusing on how to deliver value when “value” has not been clearly defined.
Transaction value: a generic definition of customer value
Customers have needs, wants and desires and they have to pay a price — a combination of time, effort and money — to get them fulfilled. The perceived value of a product or service is determined by how closely it fits the customer’s requirement, e.g. by its potential for fulfilment. If the product value is seen by the customer as higher than the price they need to pay, the transaction has a positive overall value for them. From all transactions they are aware of, the customer is likely to choose the one with the highest perceived value. Transaction value to the customer is the incentive for a purchase to take place (1).
It is important to not conflate the customer need with the transaction incentive. For example, if you want a coffee in the morning, that’s a need. You have lots of options to fulfil that need: make one at home, buy it in a can in the supermarket, go to a cafe etc. One of these options will have the highest value to you at that point in time: that value is the transaction incentive.
This principle holds true in the social sector as well. As humans, we have a desire to give back, share our fortune and reciprocate kindness; this is the customer need. However, donation is not the only fulfilment option: you can work for a charity, mow your parent’s lawn, volunteer, invite your friends for dinner. People will only choose to donate or purchase social enterprise products if that seems like the option with the highest transaction value. It is the task of social organisations to demonstrate their superior potential for fulfilment.
How to demonstrate transaction value in the social sector
We are used to measuring and demonstrating transaction value in terms of three universal indicators that work well for all consumer products: price, quality and accessibility (2). Price is the quickest way to compare similar products. Quality, which we judge by reviews, recommendations and direct experience, helps gauge fit to requirements. Accessibility can make or break the deal: without access to it, a customer gets zero value from even the cheapest and greatest product.
Social enterprises that generate profit from direct sales can and should apply these tried-and-true indicators as they serve consumers. The social nature of their product is simply a quality-based value indicator. Charitable organisations on the other hand operate in a different market, where customers observe a different set of value indicators.
The market charities operate in is the market for redistribution. Consumers purchase for their own use; donors purchase for an unknown beneficiary, which is voluntary redistribution of wealth. Charities, and even certain government agencies, provide wealth redistribution services. People who feel morally compelled to share their fortune (customer need) can do so in the form of a donation to charity (a transaction option). Transaction value logic tells us that they will donate if, and only if they believe that their chosen charity can do a better job at fair wealth redistribution than they could as an individual. Therefore, value indicators in the social sector aim at gauging organisations’ ability to put the money where it’s the most needed according to the customer.
Value indicators for redistribution-purpose transactions
If observed more closely, the three indicators used widely to gauge transaction value for consumer products are of little help to a customer in judging the value of a charitable mission. Prices can be extremely elastic — any donation is accepted –, or simply set by the customer (think government grants); so price does not denote value. Quality is a somewhat better indicator than price as social impact achieved can be measured, but it has a major issue: it is primarily aimed at the beneficiary, not the customer. Therefore, customers never quite know; they have to believe*. Accessibility is arguably somewhat relevant: social organisations have to be visible and need to provide channels for contributions. However, ease of access is an indicator wrought with selfishness and thus not the best for indicating re-distributive value.
[*Hence the endless conversations about trust in the social sector]
Instead of price, quality and accessibility, customers reference the following value indicators in the redistribution market:
Scale: Whilst price does not matter, economies of scale do. Larger agencies, charities and consortia are better positioned to achieve more with less due to lower unit costs. For example, a charity that has the funds and the capacity to purchase and distribute 10,000 units of vaccination is better positioned to have lower per unit costs than a charity distributing 100**. Scale is one way to make a donation dollar go further.
[**Providing there is no radical difference in the business model]
Reach: Reach is different from scale — you might be serving a lot of people, but are you reaching the ones in need? Are you reaching the most oppressed, discriminated against, the gravely sick, those who live below the poverty threshold? For example, if a charity is aiming to get all children in Senegal to finish primary school, one would expect the organisation to run programs in rural areas. Donors who want to make maximum difference care about reach as well as scale because reach improves marginal utility.
Voice: Supporting someone’s journey with resources is a laudable effort and indispensable to ease suffering; but it is a lot less sustainable approach than making lasting changes to the socio-economic, legal and cultural environment, thus enabling people to thrive. For example, it is much needed to support the victims of child marriage; but it is more sustainable to achieve legislative ban on the practice. Donors value charities with the ability to create fundamental, lasting change.
Niche expertise: Customers might deeply care about a cause but not have the ability to forward it much themselves. For example, someone might be very wealthy and extremely committed to find the cure for cancer, but that does not make them a cancer researcher. In this case the transaction value of donating to a cancer research centre can be very high for that individual.
Charities that communicate customer value in the form of these four indicators are more likely to engage and retain supporters.
(1) HBR: Business Marketing: Understand What Customers Value
(2) Fernández, Raquel & Bonillo, M. (2007). The concept of perceived value: A systematic review of the research
