By Juliana Koo, SOM’06

Nonprofit healthcare managers often feel conflicted about charging a price for their goods or services, especially when clients’ immediate health and welfare are at stake. On one hand, it is often the case that their target client population is poor, and placing an additional financial burden on poor people feels wrong. On the other hand, there is evidence that clients do not use donated products appropriately, resulting in lower impact of nonprofit managers’ time and investments. Here is a case where the right decision may feel completely wrong.

In her PONPO seminar on September 18, Nava Ashraf (Assistant Professor of Business Administration, Harvard Business School) presented a report of a field study that she conducted in Zambia with two colleagues to sort through the factors that affect a client’s use of a product based on whether and how much she pays for it. If it is true that pricing boosts usage, Ashraf contends that there are two potential reasons. It may be that prices screen in people who want to use the product, resulting in a higher proportion of users among the purchasers. She calls this the screening effect. It may also be that paying actually has a psychological effect that induces use.

Professor Ashraf worked with Population Services International to carry out an experiment based on the marketing of Clorin, a bottled bleach solution commonly used to purify water. PSI workers visited over 1,000 households and offered to sell them Clorin at a stated price. The offered price for each household was randomly determined. If the offer was accepted, the worker then presented a sealed envelope containing a discount coupon. Again, discounts were assigned randomly. Approximately 40% of subjects were given a $0 price via the discount. At two weeks and six weeks, PSI conducted an in-person survey to determine psychological characteristics and also tested the household water for the presence of Clorin to determine usage.

Through this two-price offer design, Professor Ashraf was able to separate out the screening and psychological effects in the data. Using the data from the first offer, she found that higher willingness to pay did predict higher use, increasing the proportion of users in the purchasing pool significantly. The researchers then used the data from the second offer as a measure of the psychological effects of the actual purchase price on the subject. While the statistical significance for psychological effects did not pan out, there did seem to be some evidence that the very act of paying did boost usage for people who were susceptible to the sunk-cost bias. In other words, for those who are more likely to use a product just because they paid money for it, pricing was a useful tool to induce them to use the Clorin.

Regarding the screening effect, Professor Ashraf found that higher willingness to pay could not be predicted based on other known characteristics. In other words, prices allow people to reveal themselves as high users of a product. And, even more helpfully, the way they reveal themselves is by paying money, which reduces the cost the nonprofit incurs to deliver the service or product it is promoting. That, in and of itself, is a useful lesson for nonprofit managers, who are trying to maximize the impact of limited resources.

Read the working paper.

Please visit the PONPO website for details on the PONPO seminar series.