If you’re reading this, it’s likely that you are looking for ways to increase your impact. Social return on investment, or social ROI, lets you objectively define and measure your impact. Once you can define and measure impact, use that ability to identify communities to serve. Decisions about who and where you choose to serve–what the private sector calls market entry decisions–have a huge influence on the impact that you have.
Measuring Impact with Social ROI
Businesses and investors measure return on investment, or ROI. Calculate ROI by dividing the additional funds you earned from your investment by the amount of your initial investment. For example, if you earn $700 in a year on your investment of $10,000, you have $700 / $10,000 or seven percent ROI.
Public and social sector marketers use social ROI. Calculate social RIO by dividing the total impact you’ve generated by the cost required to generate that impact. For example, if a jobs training program spends $6,500 to offer 40 hours of courses valued at $10,000, then the program has a social ROI of $10,000 / $6,500, or 154 percent.
Social goods and services can have far-reaching effects that should be factored into social ROI. Consider the example of our jobs training program. Say graduates of that program found jobs, earned wages, and paid $12,000 in local taxes. That’s another $12,000 that should be counted in total impact. If by finding jobs the graduates stopped using $15,000 in government services, such as housing assistance, those savings should also count towards social ROI.
Determining this type of hard dollar values for some types of impact is difficult, but it’s worth the work. Solid ROI numbers help you measure and improve your work, convince donors, and recruit staff and volunteers.
If you’re trying to choose between projects to fund and pursue, look at the projected social ROI for guidance about which to choose.
Adjusting Social ROI According to Needs
When businesses and investors are evaluating the potential ROI of several investment options, they study the level of risk associated with each investment. An investment with ROI of seven percent sounds great, unless it carries a high chance of losing your money or tying up your money for a long period of time.
With social ROI, public and social markets should look at the level of need. Solid market research helps you identify needs that you can meet. A social good or service will have a higher social RIO in communities that have more need.
The jobs training program from our example will have more meaningful impact in a community with a higher-than-average unemployment rate. You could also measure the percentage increase in local payroll taxes collected, rather than just stating tax dollars collected.
All other things being equal, choosing to serve a higher-need community yields a higher social ROI for your projects.
Case Study: Helping Small Farmers Prosper
One group using the logic of social ROI and needs adjustment is One Acre Fund. Their mission is to make small farms in developing countries more prosperous. This Stanford Social Innovation Review article describes how One Acre Fund uses social ROI and needs adjustments to decide what communities to serve.
One Acre Fund targets $4 in social impact for every $1 they invest. That’s a great return, and makes a real difference for small farms in Africa. But all small farms are not equal.
Small farms in Burundi may earn $200 a year, where Tanzania small farms may earn $450 a year. Increasing farm income in Burundi will have a relatively larger return compared to Tanzania. One Acre Fund uses this knowledge to decide what additional markets to serve:
We’ve been achieving about $100 of impact per farmer in Burundi at a net cost of $25. This SROI is on par with several other countries where we work; however, when we factor in need level, Burundi’s SROI looks much stronger. Because of this, we recently made the decision to enter four new districts in the country and collectively anticipate reaching at least 80,000 farm families by year-end.
The Impact of Social RIO on Marketing The Social Good
Market entry decisions are mainly distribution decisions; distribution decisions are crucial in maximizing your impact. Using social ROI and level of need helps you identify how much impact you generate, and where that impact can have the greatest effect.
Do you know your social ROI? If so, how do you use that to guide your market entry decisions?
(Image courtesy of Neil Palmer)