Does it pay to be good? The challenges with Corporate Social Responsibility strategies
Today, CMOs are asking how they can differentiate their brands with a socially responsible differentiation strategy. Companies are investing heavily in socially responsible practices without first testing key assumptions about whether consumers will actually reward good corporate behaviour.
Marketers say customers tend to claim they pay more for ethically produced products. Is that what happens when they actually buy things? Are consumers likely to demand a discount for unethically produced products and pay a premium for ethically produced products? If so, by how much? Most existing research assumes a positive, direct link from corporate social responsibility to corporate performance.
Today companies face some crucial questions regarding their procurement strategies. Ethical sourcing such as fair price, organic produce, and socially responsible practices are likely to increase costs. But if a company pursues a fair trade and socially responsible differentiation strategy, what sort of consumer will it appeal to? It is important to understand the role the consumer plays in ultimate company profitability through revenue generated by the prices that consumers are willing to pay for the company’s products.
The problem with existing CSR research and strategies
Most marketing research has focused on the relationships between corporate associations or expectations and consumer response. But the attention has been on the relationship between favourable corporate actions and consumer behaviour. Research addresses the question of how consumers react to positive CSR activities. And yet one of the most generally accepted and far reaching phenomena in psychology is the asymmetry in the way people react to positive and negative information about the subject. Consumers treat positive and negative information differently. Individuals react more strongly to negative information than to positive information.
New research on CSR
Typically, research has addressed these questions with surveys of consumer attitudes. Not surprisingly, those do not always reflect actual behaviour because linking actual consumer spending behaviour in the market to specific company decisions is very difficult.
New research from the Richard Ivey School of Business shows that the negative effects of unethical behaviour have a substantially greater impact on consumer willingness to pay than the positive effects of ethical behaviour. The surprising insight is consumers can demand a substantial discount from companies that product goods in an unethical manner. Consumer responses also suggest that a small degree of ethical production “pays off” as much as a heavy investment in ethical production.
This is the first study to find that consumers use price to punish unethical companies more than they use price to reward ethical companies, and that the ethicalness of a company’s behaviour is, indeed, important consideration for consumers. The conclusion is clear: Doing good will lead to doing well, and to ultimate profitability.
Difficult questions
Will consumers pay an adequate premium to recoup the increase in production costs? If less than 100% of a company’s products are from fair trade or sourced locally, can the company still maintain its socially responsible positioning? CSR may have supplanted maximizing shareholder value at any cost but as companies consider and strive to limit the negative impact of their operations on society, some questions remain unanswered: Will consumers punish unethical acts? How ethical does a company really need to be seen as ethical by consumers? Is it “greenwashing” if less than 50% of a company’s products are ethically produced? Should a company focus on the process of ethical procurement or reduce waste in the production process if it cannot afford to do both?
Our firm's sustainability study confirms that while just 17% of consumers are willing to pay a premium for ethically produced products (they have higher ethical expectations of companies), 65% of consumers expect a significant discount from companies that market unethically produced products. Therefore, while fewer consumers may be willing to pay a premium for ethically produced products, a significantly higher percentage of consumers are likely to pay less for unethically produced products.
