As a volunteer or staff for not-for-profit you might want to know how much effort to put into a free service. If it was helpful or valuable or important to many people volunteer effort might be easier to recruit. Or conversely, when deciding between competing projects how can you pick the one that delivers the most value? Or how can you compare free and paid service projects -which are like apples and oranges?
Or if you have private sector experience and would love to talk about not-for-profit activities like you did in for-profit, how to do that?
I've been asking myself those questions recently and I came up with a formula I call marginal opportunity cost, but it's really an educated guess, pulling numbers out of fairly thin air. Use with caution.
If you can sort your customers into a list starting with those who gave up little to get what you offer on one end, and those who gave up so much on the other end they almost didn't take up your free deal, then that last customer is the 'marginal' customer. What they gave up is called an opportunity cost. They could have been somewhere else doing something almost better, or their cost of transportation made coming to you almost as costly as the value they are getting for free. Calculate the opportunity cost of this marginal customer, in units of money. Then multiply that by the number of customers to get the value of the program.
For example a parade. Lets say your not-for-profit wants to enter something - an old vehicle. How much value does that create? Lets say 10,000 people come out for the parade. It's hard to know what they had to give up -their opportunity costs- but lets say for the marginal parade goer they had to give up making bread which would have been a value of their time of $10 for the 2 hour event. And lets say they had to drive, find parking, fight traffic jams at the end - all which gives hard costs and disutilities of $5. Total opportunity cost: $15. But they came. So they must have got at least $15.01 of value from attending.
Lets say there are 100 entries in the parade. $15 / 100 = 15 cents per entry on average. Some entries have music and dancing on a long float. Lets put it on a scale from 1 to 5 of value an attendee would get. The fancy float gets 5, your simple drive through scores 1, and the average is 3. 15 cents / 3 = 5 cents per point. Your entry is 1 point so it's worth 5 cents per attendee in opportunity costs. For 10,000 attendees that's 10,000 x .05 = $500. Your entry creates $500 in gross value.
If you don't hang a sign from the car - it's just a beautiful old car - then we'll call that $500 surplus value, which the attendees enjoy all to themselves. If you hang a sign on the car with the name of your organization, then some or all of that surplus value you capture as goodwill.
Now you can compare for profit and not-for-profit programs and services, and -like in the private sector- you can compute a net present value or market value of your organization, based on a discounted sum of all future goodwill generated. And you can set goals, measure and compare activities as in the private sector.
