Green Premium Or Penalty- The Real Struggle With Sustainability Strategy
Many “sustainable fashion” products are priced at a premium to their traditional peers despite being of similar, or at times inferior, functionality offerings. The underlying idea is that consumers will receive a “warm glow” feeling of helping the planet thrive and would be willing to pay a premium for that feeling, as a substitute for donations that they would have made for such causes.
Such an approach has been only marginally successful so far. For the price premium to be paid for sustainable products, the consumers need to be sufficiently aware, trust, understand, and get aligned with brands’ sustainability claims. This opens up multiple communication challenges. Given the information asymmetry and complexity of full impact understanding, consumers are more likely to gravitate to a brand that is aligned with causes they find appealing. For example, studies have found that US consumers pay premium for organic cotton clothing, but not for low impact dyes; Scandinavian consumers pay premium for ‘green’ toilet paper and paper towels, but not for detergents etc.
There are also instances that, due to perceptions or past experiences, eco-labeled implies inferior quality. For example, most consumers associate recycled water and recycled paper to be of deteriorated or lower quality. If consumers perceive that they have a trade-off between environmental attributes and other attractive product attributes such as quality, their willingness to pay a price premium gets affected.
There are Instances where premium on eco-labeled products has been successfully applied for, however customers are paying premium for their private benefits. For organic food, the purchasers do so because of their belief of receiving additional private benefits, such as better nutrition or better health or better taste, rather than their environmental attributes. Similarly, consumers purchase energy efficient LED lighting primarily because of its functional advantages over traditional light sources such as compact size, increased lifetime, and greater dimming and control capability.
While premium is hard to come by for responsible behavior, customers have tended to penalise companies for irresponsible behavior. Fashion and apparel companies have repeatedly faced boycott calls after negative media on their social and environmental footprint, poorly eco-rated hotels are known to be penalised against unrated hotels etc.
Still companies continue to see it as a marketing problem and their efforts are to build a case for a price premium due to the additional cost associated with the environmental and social improvements of the products.
Needs mindset change of corporate managers
As Sustainability discourse is getting louder, most CEOs are getting on board with sustainability, but their business heads and other senior managers either don’t “get it” or have little financial incentives or motivation to support it. Most company managers perceive sustainability as a cost driver rather than a value creator. More often than not, they have limited understanding of the full impact on the entire value chain and tend to focus on areas where they have direct control — i.e. their operations — rather than where the real impacts or opportunities lie.
It is proven that sustainability has potential to deliver attractive private benefits to consumers. For that, it is important for managers to understand the relationships between the decisions they make and the impacts which arise up and downstream. For many categories of product, lifecycle analysis will reveal that it is the ‘use phase’ of products where the largest consumption impacts arise, and better design can help consumers reap the benefits.
Given the scale and scope of impacts, corporate sustainability has to be considered in the context of collective value chain effort. But such an effort is complicated and delivery is dependent on the actions of other parties also, unless it is vertically integrated. Hence, companies cannot leave this to be handled at tactical level by managers but need to treat this at a strategic level by bringing a number of actors, both from within and outside the organisation, and across multiple disciplines. Managers can then execute their part of the strategy and as a company it can deliver the value both for private good and public good.
So what shall companies do?
Instead of treating it as an eco-tax, companies should focus on understanding and innovating around sustainability as an opportunity to introduce new additional benefits that consumers value, which can reduce customers’ sensitivity to price. This would require companies to collaborate across the value chain and indulge in industry-wide initiatives, engage in open innovations, and implement strategies to make sustainable products more affordable. Finally, they should focus on communicating the sustainability benefits of buying choices in concrete terms that can enhance a brand’s appeal to consumers.
