Ethical Consumption: When Firms Go Green, They May Not See Extra Green

For socially conscious and good-for-the-environment companies, a stellar reputation is worth its weight in gold. It may not be enough, however, to command much of a premium price.

This mixed message is the reality of the market for companies offering goods that are ethically sourced or organic, says June Cotte, Associate Professor of Marketing and Director of the PhD program at Richard Ivey School of Business, Western University.

A leading researcher in the area of ethical consumption, Cotte has learned that while consumers say they support “good” products, they are not willing to pay much extra for them.

“One of the things that we’ve found is that consumers will pay a premium for more ethical products, but the premium is actually quite small,” she told fellow researchers at the Conference on Moral and Ethical Decision Making, held at Queen's School of Business in May 2012.

As well, the premium stays the same regardless of whether a firm goes fully organic or only part of the way. “An interesting finding is that you don’t have to be 100 percent good,” she said. “We found that consumers will pay a premium if only some of the components are ethically produced. So if you have 100 percent organic cotton T-shirt, we didn’t find that consumers would be willing to pay much more than for a T-shirt that’s 50 percent organic cotton.”

The halo and horn effect

A solid “green” reputation, however, is something to build on, Cotte and colleagues have found in their studies, since it offers a halo effect for a firm’s new product offerings. “Even when we didn’t tell respondents the environmental attributes of the new product, they assumed that it was environmentally friendly because it  came from a company with a good reputation, so the halo effect is huge benefit,” said Cotte.

Conversely, woe to the company that wears the horns of a bad reputation. It can launch the most ethically sourced product on the planet but its reputation swamps the positive attributes of the the new offering, according to Cotte’s research. Walmart is an example: it has done more than most to build a sustainable supply chain but fails to get credit for its green efforts because of its controversial labour practices.

“There is this problem or opportunity for firms with well-established reputations,” said Cotte.

“You need a good reputation but also a long-term plan to overcome a bad reputation.”

One implication of the findings, in fact, is that messaging matters. “Consumers don’t want to pay more and marketers need to work on the messaging around that premium,” she said. “If they need to charge more, they need to explain why. For example, if a product has less packaging, consumers will make the connection: why do I need to pay more for less packaging.“

The role of messaging

If the plan is to charge  a premium, the messaging should focus on other ways the offering saves money. If that message is heard properly, they can expect a slight premium for better sourced or more ethical product.

Marketers and researchers in this area have to contend with the yawning gap between consumer stated intentions and actual behaviour. It has been noted that if everyone behaved according to their professed attitudes, firms that offer organic products that are fairly sourced and traded would command 95 percent market share.

This is a problem for marketing researchers, said Cotte, since three-quarters of research on corporate social responsibility is based on attitudes and intentions rather than behaviour. Studies have shown that the biggest gap between intentions and what people actually practise is in environmental issues. Said Cotte: “We need better ways to measure consumer preference and behaviour.”

— Alan Morantz