Consumers Prefer Goods from Not-for-Profits over Goods from Businesses – Research Paper

Good Business: Empirically Examining the Goods Sector as a Revenue Source for Not-for-Profits

 Abstract

The recent proliferation of not-for-profit organisations (NFPs) has intensified the competition for limited government grants and private donations causing NFPs to increasingly turn to the market for funds. While many NFPs generate commercial income from the service sector, the involvement of NFPs in the goods sector has been minimal, with the exception of NFPs that exclusively target the poor. However, an increasing number of NFPs are entering the retail sector to sell goods to the general public in order to raise funds for their social missions. In spite of this recent trend, there has been little research about NFPs in regards to the goods sector. This exploratory study examines consumer preference for NFP goods over goods from for-profit companies using an online survey so as to assess the feasibility of this commercial revenue strategy. The study relies on the contract failure theory and socially responsible consumer behaviour to explain consumer preference for NFP goods. The findings indicate that consumers generally prefer NFP goods over goods from for-profit companies and that preference is even greater for goods that cannot be readily evaluated in terms of quality.

 Introduction

The accelerated growth of the NFP sector since the 1990s has significantly escalated competition among NFPs for private donations and government grants causing them to increasingly turn to the market for funds (Claude, 2010; Ebrahim, 2003; Froelich, 1999; Horne, 2000; Weisbrod 1998). As a result, globally, NFPs now generate most of their income from commercial activities (Austin, Gutiérrez and Ogliastri, 2007). On further investigation, most of this commercial income is derived from fees for services such as healthcare, education, and childcare – industries where NFPs successfully compete against for-profit companies. Income from the goods sector has been relatively minimal (Hammack, 2001). However, there is an emerging trend of NFPs entering the retail sector to sell goods such as clothes, carpets, bicycles, restaurant meals, coffee, and so forth to the general public in order to raise funds for their missions (Claude, 2010; Formosa, 2009; Horne, 2000; Moin, 2010; Saeed, 2010; Skewes, 2009). If NFPs can replicate the general success in the service sector in the goods sector, the new stream of income from the goods sector could provide the answer to waning donations and grants. This would be especially encouraging for smaller NFPs that receive little attention from private donors and governmental bodies (Froelich, 1999). As for-profit companies currently dominate the goods sector, the viability of the revenue strategy for NFPs in this sector would depend heavily on how well they can compete against for-profits. This paper investigates consumer preference for NFP goods over goods from for-profit companies as it is a key indicator of how well NFPs can compete against for-profits in the goods market.

Literature Review

The dominant theory for explaining the existence of NFPs in the commercial sector – especially in service industries such as healthcare, education, and childcare – has been the “contract failure” theory proposed by Henry Hansmann in 1980 (Ali, Spillan and DeShields, 2004; Glaeser and Shleifer, 2001; Hirth, 1999; Handy, Seto and Wakaruk, 2010; Malani and David, 2008; Schlesinger, Mitchell, and Gray, 2004). Consumers cannot accurately evaluate the quality of some goods and services (e.g. a course at a university) when they make an agreement (contract) to purchase them; subsequently, as they normally cannot renege on the contract after an agreement to purchase a good or service, consumers are stuck with the good or service even if its quality falls below their expectations (contract failure). For these types of products, consumers prefer to purchase from NFPs rather than for-profits because they tend to trust NFPs more as for-profits may have the motive to compromise product quality by cutting costs to increase profit (Hansmann, 1980). Past studies have found that consumers generally do trust NFPs more than for-profits (Handy, Seto and Wakaruk, 2010; Schlesinger, Mitchell, and Gray, 2004; Webb and Mohr, 1998).

Contract failure explains consumer preference for NFP services over services from for-profit companies and the concomitant widespread presence of NFPs in the service sector (Glaeser and Shleifer, 2001; Hansmann, 1980; Hirth, 1999). Also, more complex services such as healthcare have higher levels of contract failure and corresponding consumer preference than less complex services such as fitness centres (Handy, Seto and Wakaruk, 2010). However, little is known about the role of contract failure in the goods sector in regards to NFPs. Hansmann did originally claim that there would not be enough contract failure for standardised industrial goods such as basic food so as to necessitate the existence of NFPs in the sector (Hansmann, 1980). Nevertheless, he refers to the “nature of a product” as being a critical factor in the degree of contract failure, implying that goods, too, can lead to contract failure (Hansmann, 1980, p. 843). Thus, it can be inferred that although NFPs are not ‘needed’ in the goods sector, they might still benefit from contract failure for certain goods if they were to enter the sector. The recent entry of NFPs in the goods sector points towards this possibility (Austin, Gutiérrez and Ogliastri, 2007; Horne, 2000; Parsons, 2004).

As much as contract failure might account for consumer preference for NFP goods over goods from for-profit companies, the potential contribution of socially responsible consumer behaviour (SRCB) cannot be ignored (Singh, de los Salmones, and del Bosque, 2007; Webb and Mohr, 1998). SRCB, in this context, is a consumer basing buying decisions on how socially responsible companies are (Mohr, Webb and Harris, 2001, p. 47). There have been many studies in the for-profit sector that have shown a positive relationship between how socially responsible a company is and consumers’ preferences for the company’s products (Brown and Dacin, 1997; Friedman, 1996; Mohr, Webb and Harris, 2001; de los Salmones, Crespo and del Bosque, 2005). Furthermore, consumers tend to perceive NFPs to be more socially responsible than for-profits (Handy, Seto and Wakaruk, 2010; Schlesinger, Mitchell and Gray, 2004; Smith and David, 1991). Therefore, in addition to contract failure, SRCB would have to be considered as a factor in consumer preference for NFP goods over goods from for-profits. Thus, two research questions emerge out of the preceding discussions:

Q1: Do consumers prefer goods from not-for-profits more than goods from for-profits?

Q2: Is there an association between consumer preference for NFP products and SRCB?

 Method

An online survey instrument was developed and a convenience sample of consumers was used to collect data for the research questions. Participants accessed the survey voluntarily through links provided on personal Facebook pages of several individuals – Facebook being a widely used social networking website (“Facebook,” 2012).  The title for the link and the questionnaire, “The Mentality of the Modern Day Consumer,” was purposely vague so as to reduce response bias. 100 responses were collected, with 70 complete responses and nine partially complete responses; the nine were used only for the first research question.

In the online questionnaire, participants were asked to choose between two products, labelled A and B, of the same product class presented in images in the first section, similar to Soman (2004). After completing the first section, participants were asked to choose between the same products again in the second section but this time with additional information about companies that produced them – one was produced by a not-for-profit and the other by a for-profit (see Appendix A). A 7-point anchored bipolar scale was used to measure the strength of preference for either A or B, with the middle point being “no preference.” If the respondent chose a certain response in the first section but changed the response for that product after viewing information about the providers in the second section, this was taken as indicating preference for the provider the response changed towards. This two-section approach was used in order to measure preference purely as a function of what type of firm produced it, separated from other factors such as visual cues. Participants were also asked how much more they were willing pay (price premium) for the chosen product over the other.

Five product classes were used: prepared coffee, small carpet, bottled water, packaged orange juice, and prepared meal. Product classes were chosen as opposed to brands and providers were fictitious so as to eliminate any prior biases that might stem from association (Brown and Dacin, 1997; Laroche, Bergeron and Goutaland, 2003). Products were chosen according to attributes relating to contractibility of quality based on the contract failure theory of Hansmann (1980). Coffee, juice, and meal represented goods that were more non-contractible in quality – quality could not be ascertained during purchase – and carpet and water represented more contractible goods – “what you see is what you get.” As appropriate measures for contract failure in goods could not be found due to limited research in the area, a new construct was developed based on the qualitative feedback of five participants who participated in a pilot survey as well as the perceived risk classifications of products by Murray and Schlacter (1990) as perceived risk essentially denotes contract failure.

Additional information for coffee, carpet, and water in the second section was limited to the status of the provider (NFP or for-profit). The additional information for juice and meal presented social responsibility information about the providers (see Appendix B). Social responsibility information about the for-profit company was positive for juice and negative for meal, while it was only positive for NFPs. The differences in preference for three similar types of goods (i.e. non-contractible) with varying social responsibility information is a way to determine the contribution of SRCB to consumer preference as social responsibility information invokes strong product reactions (Brown and Dacin, 1997). The third section gathered the SRCB profiles – past SRCB buying behaviour. Participants had to choose from five statements that corresponded with the SRCB typology developed by Mohr, Webb and Harris (2001) that captured SRCB in increasing levels. Those choosing the first three statements were “non-SRCB consumers” and the last two were “SRCB consumers”.

A majority of the respondents were between the age of 21 and 30 with 20% over the age of 30 and 20% under the age of 21. Most of the respondents were pursuing or had completed a bachelor degree. Three-fourths of the sample was generally knowledgeable about NFPs and for-profits. Pertinently, 83% agreed to the statement (over 45% strongly agreed), “The intention to make profit can lead to unethical actions,” while 7% disagreed. A majority also agreed that NFPs tend to be more socially responsible than for-profit companies.

 Results

In regards to the first research question, consumer preference was measured by the change in preference between the first and second sections of the questionnaire. The 7-point interval scale for product preference was used as a -3 to +3 interval scale for data manipulation in SPSS, with 0 being “no preference.” In the survey, the NFP products were placed as A (towards -3) for water and juice and as B (towards +3) for coffee, carpet, and meal. For example, in Table 1, the mean in the first section for ‘Juice’ is 0.38, revealing that respondents slightly preferred Juice B on average; however, mean in the second section for Juice changes to -1.41, indicating that respondents relatively strongly preferred Juice A on average after reading that Juice A was produced by an NFP. This shows a clear preference for the NFP over the for-profit company as this preference change is purely a function of the reaction to the new information. A paired sample t-test between preference in the first section and preference in the second section revealed that the change in preference was significant and that the change was towards the NFP provider for all five product classes (Table 1).

Table 1                                                                  ** is (p < 0.01), *** is (p < 0.001)

Product class

Mean in first section (n=79)

Mean in second section (n=79)

Significance level

Avg. Price premium for NFP products (n)

Coffee

1.15

1.84

.001**

14.82% (16)

Carpet

.58

1.16

.001**

32.33% (6)

Water

-.22

-1.48

.000***

17.41% (27)

Juice

.38

-1.41

.000***

17.59% (32)

Meal

-.82

.54

.000***

18.75% (25)

The approach used to answer the second research question was to test for differences between the two groups, SRCB consumers (n=27) and non-SRCB consumers (n=46), in terms of preference change and also to test for differences in preference change between the products with varying social responsibility information about the providers. Preference change was calculated by subtracting the response in the first section from the response in the second section, the resulting number indicating the strength of preference for the provider. For the first approach, an independent t-test was performed. Here, SRCB consumers (M=1.185, SD=1.798) had significantly greater preference change towards NFP carpet (t=3.98, p=0.000) than non-SRCB consumers (M=0.022, SD=0.649). Further, SRCB consumers (M=-1.889, SD=2.025) had greater preference change towards NFP water (t=-2.12, p=0.037) than non-SRCB consumers (M=-0.891, SD=1.889). No significant differences between the two groups were observed for non-contractible products. Thus, SRCB played the major role in consumer preference for the contractible goods, especially for carpet as mean is only 0.022 for non-SRCB consumers. However, since consumer preference for NFP products was also high for non-contractible goods, it can be inferred that contract failure played the major role as even non-SRCB consumers showed significant preference for non-contractible NFP products.

For the second approach, paired sample t-tests were conducted between non-contractible goods that had varied levels of social responsibility information. It revealed that participants preferred NFP juice (M=1.785, SD=2.319) significantly more (t=-3.327, p=0.001) than they preferred NFP coffee (M=0.683, SD=1.829). The difference was close to significant (t=-1.905, p=0.060) at the p < .05 level between coffee and meal (M=1.367, SD=2.552). The difference was insignificant between juice and meal. Therefore, more social responsibility information about NFPs invokes greater SRCB and increases preference for NFP goods.

 Conclusion and Limitations

In summary, consumers prefer NFP goods over for-profit goods because of SRCB. Moreover, contract failure strengthens this preference for non-contractible NFP goods. Since consumers are generally willing to pay an average of over 15% price premium for NFP goods, generating revenue surplus for social missions is also a good possibility. To ensure the greatest advantage, NFPs should sell non-contractible goods and display not only their NFP status but also information about their missions (social responsibility) for greater consumer preference – also found in previous studies (Handy, Seto and Wakaruk, 2010; Schlesinger, Mitchell, and Gray, 2004). As this study assumed parity in price, offering products at the general market rate would make the findings more applicable. Additionally, for greater applicability the consumer would have to be choosing between products for which there is little product experience (for example, products targeted at tourists or new immigrants).

Limitations of this study are the sample size, sample representativeness, and the use of a convenience sample. Also, social desirability bias – participants wanting to appear benevolent – may have influenced the responses (Mohr, Webb and Harris, 2001). The attitude-behaviour gap found in past studies may also limit the applicability of the findings (Boulstridge and Carrigan, 1993). Future research expanding on this study should also develop a more systematic and scientific approach to measure contract failure in goods.

——————————————————————————

Appendix A

Survey to measure consumer preference for not-for-profit products

 

Appendix B

Product

Information about NFP

Information about for-profit company

Coffee

Café Dolce is a business (for-profit company). Kinfolk Café is a not-for-profit company.

Carpet

Woolsmiths is a business. Its profits are distributed to the owners of the business. Gaia is a not-for-profit company. Its revenue surplus goes back into the company for development purposes.

Water

Encompass is a not-for-profit company. It sources its water from streams high up in the Himalayas. H two O is a profitable business. It sources its water from deep in the Alps.

Juice

EcoJuice is a not-for-profit company. It sources its oranges from organic farms in South America and pays fair trade prices to the farmers (similar prices to farmers in developed countries). EcoJuice also donates a large portion of its revenue surplus to charities in South America that give scholarships to farmers’ children for attending schools and universities. Original is a well-known business (for-profit). It sources its oranges from Asia. Original has consistently maintained and surpassed the standards required by the government regulatory bodies. Original sponsors various sports tournaments for children, which might not have been possible without its support.

Meal*

Mogul is a restaurant chain (for-profit). The company has 4 restaurants in town. Mogul advertises that it sources its ingredients from small farms where animals are treated right. It also has its own well-known charity to support children with disabilities.

[NFP] Spiral is a not-for-profit company. The primary goal of for-profit businesses like Mogul is to make as much money as possible for its owners. Mogul’s charity is completely supported by customer donations and the small farms that are its suppliers are not that small and are not organic farms. But Spiral is quite different. Since it does not have to make any profits for any person, its primary goal is to serve the healthiest and best food possible – quality is the highest priority. Also, because there is no pressure to make as much profit as possible, it can afford to be environmentally friendly, keep its employees happy, and contribute to charities and social causes that it believes in from its own revenue surplus.

 

* Negative social responsibility information about the for-profit presented on the NFP side.

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This blog is called back to evolution because it is partly influenced by evolutionary psychology as a tool to explain human behavior in the modern world. It is also influenced by the belief that nothing should be taken at face value and everything should be challenged. Most importantly, it is inspired by the possibility of understanding the human psyche in order to promote the well-being of our global community as a whole. - Hridesh Gajurel
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