Impact Investing Lesson: Need does not drive demand

Last  year, I shared 10 lessons learned over a decade of our Impact Investing journey in India. I’m starting 2018 with a deep dive into one of those lessons: Need does not drive demand.

There is a tendency for both businesses and philanthropists to sometimes equate need with demand. Need is informed by an entity or funder’s assessment of what they consider is required to improve the quality of life of their customers. Demand, in a market context, comprises of both an ability and willingness to pay for products or services, or at least participate in the process. Building a business requires that customers demand the product or service, not just that it serves their needs. Philanthropists often find themselves in a position where the two may not coincide: while there may be a strong need in a given community, and while there may be solutions to address this need, there may not be market demand from beneficiaries for those solutions.

My colleague, Neeraj Aggarwal, discussed the importance of the “beneficiary feedback loop” in impact investing in an earlier blog post.  In that post, he used the example of Sub-K. In 2009, the foundation invested in this financial services company based in India to help more people open savings accounts.  The company had to pivot its model to ensure alignment with customer demand after realizing that while customers needed a savings solution, they were not actually willing to pay for it. In other words, there was no demand for their solution.

The Sub-K experience does not suggest that savings-led products are not a need for low-income consumers. Nor does it suggest that there will never be demand for it by potential beneficiaries. Our experience simply illustrates that there can be a timing mismatch between need and demand, or that need and demand may not coincide. The challenge for impact investors is whether to keep funding solutions for the identified need in the absence of demand, or patiently wait for the need to translate to market demand.

Another example of the need – demand paradox is the foundation’s investment in NEST. We experimented with remedial coaching for primary grade students from low-income families. The students were typically first-generation learners. We noted that schools in India focused heavily on rote learning. We wanted the NEST model to focus instead on conceptual clarity, and the application of concepts. NEST rolled out a well-curated and tested pedagogy of concept-based learning in approximately 20 centers in Delhi and Mumbai.

However, we learned that the markers of student success for parents were completion of homework, neatness, and volume of writing, rather than concept-based learning. We knew that these characteristics, while valued by parents, showed limited impact in test results in the short term. It quickly became apparent that while there was a demand from parents for students to complete homework and to fare well in school exams and tests, the focus on concepts was only a need felt by NEST and us.

Had we allowed some time to pass, the need we identified and the demand the parents expressed may have started coinciding when parents eventually saw the benefits of conceptual learning. However, in the short term, it was important to cater to NEST’s market demand, or else we would have risked parents pulling their children out of the centers if their markers of student success weren’t being met.

So, we did exactly that. We customized the curriculum to include things like homework completion and review, without diluting the focus on concept clarity. Over the course of a few months, parents started recognizing the importance of conceptual learning and started to “demand” improvement in understanding concepts, rather than focusing only on homework.

To summarize, it’s essential to be aware of the real market demand versus customers’ needs, and to use that knowledge as a roadmap for your investments.  In our experience, the key to getting it right is to listen and understand the needs of your customers.