Saturday was my daughter’s fifth birthday party. At 8:30am she was running at top speed (the only speed she moves at) through her grandparents’ house, tripped and hit cheekbone first into the edge of a flight of stairs. 30 minutes later we were all in the ER where she was getting 7 stitches. They say she’ll be fine. Oh, and we were home with 20 minutes to spare before 17 little girls showed up for a “princess party” in celebration of her birthday (I was one of the only “princes” allowed).
I guess any doctor at any hospital could have sewed 7 stitches. But the two nurses (one an older woman and the other a young man) at the hospital we went to spent a lot of time asking my daughter all about her birthday plans and made it clear that they felt it was a priority for her to get home in time for her party. Amazingly, we all left in good spirits and my daughter was able to fully enjoy her party.
Health care can be a commodity or it can be a premium product. A commodity is an item that is indistinguishable from competing products and therefore consumers make purchasing decisions based mainly on price . Gasoline is a commodity. If a station on one corner is cheaper than on the other corner, most people will always go to the cheaper station. Wine is a premium product. 750ml of wine is always just fermented grape juice. But the quality of the wine leads to vastly different prices.
This weekend, my family experienced health care delivered as a premium product. I would gladly pay a significant premium to entrust the care of my child to health care professionals who were sensitive to the emotional as well as physical needs of my daughter.
So here’s my question: Do nonprofits deliver a commodity or a premium product/service? This isn’t a leading question. Commodities are not inferior to premium products, they are just subject to different kinds of markets and business models. When you deliver a commodity, there is only one way to compete: Eliminate costs, strive to be the low cost producer and slash prices below your competitors. As an investor in this kind of business, you want to find organizations that are highly efficient, productive and know how to squeeze costs out of the system.
When you invest in a premium product company, you want to find organizations that are innovative, visionary and know how to create a product or service that serves people’s needs better than competitors so that customers will pay up and create high profit margins.
So in the nonprofit world, when we look for low overhead expenses, when we ask nonprofits to underpay their employees, when we want every dollar to go to “program” we are making the implicit statement that we believe they are supplying a commodity product. Is this what we believe? Is this what you believe?
4 Comments
Sean,
I’m so sorry to read about your daughter’s accident. I hope she’s recovering well.
Your question about commodity vs. premium product goes right to the heart of the concern about nonprofit hospitals. It will be important to keep this in mind in the near future, as Congress increases scrutiny of nonprofit hospitals. From what I have seen, health care, done well, cannot be a commodity. That’s why for most of our history, hospitals needed to be nonprofit. The current push to take tax exemption away from some hospitals is looking through the wrong end of the telescope. It’s driven by competitive desire for profits (spurred by requests from campaign contributors) in that small slice of the health industry that can support that, rather than looking at the whole picture of health care in this country, the number of uninsured and so on. Full disclosure: My wife is Associate General Counsel for a nonprofit cancer research and treatment center, and within a week of starting there, in her required physical they discovered an enlarged thyroid, and so we experienced firsthand what it was like to be a consumer of their services.
Away from health care, I agree with your point that the traditional view of nonprofits that asks about overhead does treat nonprofits a bit like commodity producers. Ironically, a lot of the glow around “social purpose enterprise” seems to assume that, simply because there is some fee-based discipline (I won’t say market pricing), that magically there is going to be innovation, where there would not in a “traditional” nonprofit as service provider setting. I think that assumption is often wrong, on both ends.
Best,
Pete
Sean,
Glad to hear your daughter was still able to enjoy her birthday – kudos to some great medical staff.
I think you raise a great question in this post – one with implications for organizations well beyond direct service providers. In fact this is an implicit question we, at the Center for Effective Philanthropy, frequently find ourselves asking funders’ boards of directors as we present assessment results. If the funder in question is non-strategic (a “Charitable Banker”) and it’s just trying to get money out the door efficiently, then there could be a lot of value in a commodity viewpoint and a zealous pursuit of minimizing it’s own administrative expenses.
But more frequently, staff and directors alike see themselves as premium: creating knowledge, conducting and analyzing research, providing technical assistance to recipients, interacting with grantees and other stakeholders to hone strategies and tactics, and more. And yet, many still won’t stomach administrative spending that rises above “typical” for foundations – because that cost data is the only publicly reported data. The power of the commodity argument is that, if you accept that many funders are super-efficient, “low-cost” funders, then other funders should expect higher than typical administrative costs.
That’s certainly not an apology for wasteful spending, of which I’m sure there’s plenty. But it is an argument for a more rational conversation within organizations about aligning approach with organizational capacity – and thus administrative cost. And it’s a call to verify, with external stakeholders, whether you’re actually providing a commodity or something more premium.
Peter, I think that whether a product/service is a commodity or a premium product does not give us any insight into whether it should be delivered by a nonprofit or a for-profit. Instead, I would argue that when the “social value” of a product or service is not adequately maximized by for-profits, it should be delivered via nonprofit.
For-profit hospitals could easily decide that profit maximization meant providing quality emotional care. However, in our health care system, the customer is mostly insurance companies, not patients. Traditionally insurance companies have not cared about the emotional well being of their clients.
However, we have a cultural value that says sick people should be taken care of even if they do not have the ability to pay. This means that the system must be at least partially supported by the public and so the nonprofit structure often makes sense.
Kevin,
I was speaking more to the business model of nonprofits rather than foundations, but I think the analogy still holds.
To the extent a foundation wants to simply act as a conduit to nonprofits, costs should be squeezed out. But to the extent the foundation views itself as an intelligent organization that adds value to the grantmaking process, than costs (while important) are secondary to the value being created. In this sort of “premium product” analysis, a foundation would want to judge itself by impact more than cost structure.