by: David Wigder
Many green products require a premium to offset higher costs associated with mitigating environmental impact. In certain categories, consumers have already demonstrated their willingness to pay higher prices for environmentally-friendly products.
For example, consumers pay a premium for hybrid cars (albeit the price is somewhat offset by lower operating costs). But, can this willingness be translated across broader product categories?
While market research suggests that consumers are willing to pay higher prices for socially responsible products, the only way to quantify this is through in-market testing. Harvard professor, Michael Hiscox, and his student, Nicholas Smyth, have done just that, testing demand for and price elasticity of products with socially-responsible labeling. (”Is There Consumer Demand for Improved Labor Standards?“, 2005) While this paper compares consumer purchasing behavior for manufactured products that specify fair labor practices (vs. no labeling), there are potential learnings that may be extended to green marketing.
Hiscox and Smyth tested demand for two products – towels (staple product) and candles (luxury) – using socially-responsible labels in ABC Carpet and Home, a home décor store catering to relatively affluent consumers on New York City’s Upper East Side. (A third product, handmade dolls, was also tested but used a less rigorous control – last year’s sales).
Results were impressive:
The ratio of socially labeled products sold increased significantly relative to unlabeled (baseline) products (12% increase for labeled towels and 26% for candles). Moreover, this trend accelerated when prices for the labeled products increased 10% (perhaps giving more credibility to the socially responsible product). In fact, the ratio of labeled products sold increased 37% for towels and 67% for candles vs. unlabeled (baseline), resulting in a significant increase in revenue for labeled products (due to increase in units sold + increase in revenue per product).
With a 20% increase in the price, the increase in the ratio of labeled towels sold (vs. unlabeled) was similar to a 10% price increase, demonstrating inelasticity of demand with higher prices for towels. With a 20% increase in the price of candles, demand did not increase (as with a 10% price increase), however, but rather remained the same as baseline (unlabeled control). Nonetheless, given the 20% price increase, total revenue was 20% greater than baseline.
Overall, this test suggests that companies that switch to socially labeled products could increase price by 10-20% and expect that overall demand to rise (at least for relatively affluent customers). While the test needs to be replicated using green product labeling and expanded to include less affluent consumers, it strongly suggests that consumers may be willing to pay a premium for green products. Green marketers should take note.