Monday
June 6
2011

Bryan Farris

NexThought Monday: Building a Better Value Pump

Imagine, for a moment, that you pump up soccer balls for a living. Let me rephrase that: suppose that you offer value to the world: you pump air into a ball that was previously flat and in doing so you create value.

The person you do this for could, theoretically, do this themselves, but the value of having a pumped up ball is higher to them than the value of what you charge for the service. This gap between what the service is worth to them and what you charge is your value proposition.

Value propositions are everywhere and fundamentally drive economic growth. In fact, in this simple story, there is another value proposition at play: presumably, the amount you charge to pump up a ball is more than it ’costs’ you to pump it, otherwise you wouldn’t pump … at least not at that price.

Let’s look closer at this ’cost’. There are a lot of factors that come into play here. Fundamentally it’s a question of whether pumping balls full-time allows you to buy what you need and want. This depends largely on how much demand exists, how many balls you can pump in a day and the costs of the things you need and want (food, shelter, entertainment and so on).

Note that this ’cost’ is necessarily determined in real terms-the actual price of things you need and want is irrelevant as long as the price you charge is sufficient to cover the difference. The value of a job to you is tied to the standard of living that job allows you to achieve. This is important to understand because any external factor, such as a rise in food prices, can reduce the value proposition to you of the same exact job.

Poverty and the System

The system breaks when the value proposition isn’t working. When an employer mistreats her employees, they see no value in the proposition & they rebel (if they can). If superior alternative value propositions exist, employees will leave for those opportunities.

Poverty arises when no one is actually adding any value or when value is misappropriated.

When you look at the standard of living for the common man 1,000 years ago…or even just 100 years ago, today’s poor are generally better off then yesterday’s middle class … however slight the improvement may be.

Today’s poor are ’poor’ only by virtue of having not kept up with economic growth.

At some point along the way, the poor were exploited; in other words they were not given a fair value proposition. Take slavery as an example; the value proposition was either comply or be killed/brutalized. Slavery worked because the slaves determined that the value of being alive is worth more than the cost of being a slave. Such exploitation lead to expanding income gaps.

The tragedy is that today’s poor are missing out on opportunities for better health, education and shelter-opportunities that simply did not exist in the past.

Strengthening the Value Pump

At the end of the day social entrepreneurship should not just be about creating products and services that offer a value proposition to the poor. Social entrepreneurs should be focused on enhancing the poor’s value proposition to society. There are two ways you can do this, either by making the poor more useful to society (e.g. selling them a pump that can pump more balls per hour) or by reducing the costs faced by the poor (e.g. sell me health insurance for my family so that I can take off less days per year). How can we increase the poor’s productive abilities?

The logic is simple: the more that the poor can produce for society, the higher they will be valued and the better the standard of living they will be rewarded with.

Social entrepreneurs continually need to ask themselves what they are doing to improve the value proposition. In simpler terms: are they truly creating value for the poor?

Every plus has a minus and it is critical that social entrepreneurs properly weigh the downside half of their value proposition (e.g. hidden costs, inconveniences, alternative priorities, utility).

Do the social entrepreneurs account for the difference between perceived value and real value? Do they market properly to clarify the message? None of these are easy questions to answer, but we should be focused on enhancing the value of what the poor have to offer and on improving their ability to capture that value. We should be finding opportunities and sharing them with the poor-like the chance to charge more for pumping balls at the soccer fields on a Sunday.

There is an old proverb that applies well here: Give a man a fish and you feed him today, teach a man to fish and you feed him for a lifetime (assuming of course that negative environmental externalities don’t backfire, but that’s probably neither here nor there).

In the same way, it would be better for social entrepreneurs to sell a woman an advanced fishing pole, than to sell that woman extra nutritious fish. The fishing pole is a value pump – let’s find more of those.

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Citi Foundation, consumer products