Say a consumer products company decides to launch a chain of bistros. It wants to distinguish itself from its competitors, so it's considering going the socially responsible route, selling ethically produced goods, fair-trade coffee and chocolate, along with locally produced organic fruits, vegetables and meat.
Is this a good decision? Certainly, it would limit the negative impact of its operations on society and the environment, but—to be blunt—it would also cost more. Thus, the question becomes whether consumers will pay enough extra so that the company can recoup the increased production costs.
In fact, according to two researchers, consumers will pay more for ethically produced goods. As well, consumers will demand discounts from companies that don't produce goods in an ethical manner. In short, doing good will lead to doing well.
Remi Trudel, a marketing doctoral candidate, and June Cotte, an associate professor, both at the University of Western Ontario, did a study indicating that consumers use price to punish unethical companies more than they use price to reward ethical ones. Most marketing research addresses how consumers react to companies' positive activities. Yet people react more strongly to negative information than they do to positive—negative events have more of an impact on them. Studies have shown, for instance, that when people learn of amoral behavior, thoughts of previous moral acts quickly vanish. However, the opposite doesn't prove true: People don't easily forget previously amoral behavior even after ethical acts have been resumed.
Trudel and Cotte focused their experiment around what consumers would pay for coffee. They divided people into three groups, giving each group a different message about the coffee they'd be asked to purchase. The first group—the one they labeled "ethical"—read a message telling them that a local grocery store was running a market survey of new products, one of which was "Café Direct" brand premium coffee. And they read that their evaluation of the coffee would influence whether the grocery store chose this product over others.
They then read information about the taste and character of Café Direct's coffee before finding a final paragraph that told them the coffee was fair-trade. The paragraph explained what that meant: The trading partnership offers better trading conditions for coffee bean farmers and supports sustainable environmental farming practices. The group also read that fair trade practices prohibit child or forced labor.
The second group—labeled "unethical—read the same introductory information about the product and their role in helping the grocery store decide which products to offer. They then read a final paragraph telling them that Café Direct had been criticized for unsustainable farming practices that may harm the environment and for unfair trade practices involving employing underage children.The third group—the control group—read about the product and their role in helping the grocery store, but the researchers gave them no ethical information.
After reading about the company and its coffee, all three groups responded about their willingness to pay for one pound of coffee, using an 11-point scale ranging from $5 to $15, at one dollar intervals. The researchers then asked them to assess their overall attitude toward fair trade practices, giving people three possible responses: Did they prefer to let the market sort out the trade rights of farmers and sustainable farming practices? Did they think regulations were necessary to protect farmers' trade rights and farming practices? Or did they believe in a combination of market and regulation?
It turns out that the premium consumers would pay as a reward for fair trade practices was $1.40 per pound. And the punishment or discount for unfair trade practices was $2.40 per pound. Therefore, the negative information about trade practices had almost twice the impact of the positive information when it came to the consumer's willingness to pay. In other words, there is financial reward for socially responsible behavior.
And just as important, the researchers learned, consumers will punish the producers of unethically produced goods more than they will reward a company that offers ethically produced goods. Companies take note: Consumers may still purchase your products if they're unethically produced, but only at a substantial discount.