Yesterday I asked whether nonprofits delivered a commodity of a premium product/service. I want to reiterate that I did not use “commodity” to mean “inferior to a premium product.” I meant commodity to refer to homogeneous products that consumers general choose between based solely on price. Examples: milk, gasoline, printer paper, computer storage devices, generic pharmaceuticals. For-profit organizations can make a TON of money selling commodities (see oil & gas companies during the past few years), so I am not suggesting that selling premium products is somehow superior to selling a commodity.
Let’s think about the nonprofit space. If Organization A can deliver vaccines in Africa for $5 per shot and Organization B can deliver it for $10 a shot, a rational donor would likely fund Organization A. The assumption behind that decision rests on the idea that the product being delivered (a vaccination) is identical and so the most important thing to consider is cost. But what if we look at pre-school education? I don’t care how many teacher-hours are delivered per dollar. I care about the quality of the teaching (because the teaching is not an end to itself, it is the education of the child that we care about). In this environment, we have a premium product market where a rational donor will judge cost in relation to value. However cost still matters. A Lexus might be worth twice as much as a Ford, but even though it is a better car it would not be rational to pay 100 times the cost of a Ford.
When I think back on the discussions we’ve had about overhead expense ratios and the fallacy of quantitatively evaluating nonprofits, I realize that the commodity/premium product dichotomy can help us understand when to look at cost and when cost can be misleading.
There are a lot of nonprofits that deliver commodity-like products and that’s OK. Those organizations should be judged based on cost of delivery. But many, many nonprofits deliver a premium product that is better (or worse) than similar products offered by competing nonprofits (and for-profits). These organizations should be judged on the quality of their product and the cost of delivery in relation to the level of quality.