Questions from the field: What goes into pricing an outcome in PFS?

A colleague in the field responded to our recent publication, From Evidence to Outcomes: Using Evidence to Inform Pay for Success Project Design. He asked two questions through the PFSI Support Center: 1) What is a reasonable outcome target level?, and 2) What is the right price for each outcome?

These questions are too large to address in a single blog post—selecting and pricing outcomes is a complex issue at the heart of every pay for success (PFS) project. However, it is possible to lay out some guiding principles to help stakeholders begin thinking through these questions. A recent blog post on defining outcome targets and metrics is a useful primer. Additionally, a forthcoming toolkit on early childhood education PFS projects will include an in-depth look at selecting and pricing outcomes. In the meantime, this post will focus on basic principles for calculating a price for an outcome that has already been selected and the target level established.

There are three primary considerations when pricing outcomes:

The value of the outcome. “Value” refers primarily to the wellbeing benefits to the participants in the program. Is the program affecting participants in a consistent, long-term, sustainable way? How large are the benefits? Will participants continue to benefit after the program ends? Are the benefits meaningful to the participants and community? For example, what is the value of increasing the high school graduation rate for at-risk students?

The value of the outcome can take into account both the intangible, incalculable social good that comes with many PFS projects, and the measurable economic benefits that the program could produce.

Risk to the investor. How risky are the outcome measures? Meeting target outcomes for a program with a strong evaluation history (multiple RCTs) and consistent results is more likely—and therefore less risky—than for a program with a less rigorous evaluation history. In traditional investing, higher-risk investments are associated with higher rewards. It is too soon to establish a trend in PFS, but projects with the lofty outcome targets may require larger success payments to mitigate risk for funders.

Savings to government. In some cases, the price of an outcome accounts for savings accrued to government as a result of the intervention. If the government expects to reduce costs in the criminal justice system through a recidivism intervention, for example, those savings can factor into the outcomes price. Moving forward, the field may place less emphasis on tangible cost savings.

Overall, outcomes prices should incorporate the likelihood that outcome metrics will be achieved based on previous evaluations, the long-term impact of outcomes on individuals and the community, and any cost savings to government as a result of the intervention.

The Pay for Success Initiative is in the process of developing a Project Assessment Tool that includes some of these considerations. In the meantime, the WSIPP benefit-cost analyses, which calculate the probability that benefits will exceed cost of implementation for programs with existing evidence bases, are a useful tool. Though not directly translatable to pricing outcomes in PFS, this clearinghouse offers a frame for thinking about calculating the cost of achieving outcomes.

Have a Pay for Success question? Ask our experts here! 

As an organization, the Urban Institute does not take positions on issues. Scholars are independent and empowered to share their evidence-based views and recommendations shaped by research. Photo via Shutterstock.