Compliance is not just about complying with legal requirements. After all, legal requirements are just a minimum standard of behavior. Your company can (and probably should) operate at a higher level.
Sustainability and ethically produced products are are areas that some companies are spending extra resources. At some point you run into a business ethics conundrum. Are you losing too much in the way of profits for your company to justify spending the extra funds on these initiatives?
It would be great to be in the sweet spot where there is extra revenue to be made from customers willing to pay a premium for ethically produced goods. The company does good AND generates more revenue. That takes the ethical issues off the table.
Remi Trudel and June Cotte conducted some research on this topic and published the results in an article in the Winter 2009 edition of the MIT Sloan Management Review: Does It Pay To Be Good?
They ran two experiments: one on coffee purchasers and a second on t-shirts purchasers. For the coffee experiment, coffee-drinking adult consumers were divided into three groups with different ethical information manipulations.
Our results showed that the premium consumers would pay as a reward for fair trade practices was $1.40 per pound, while the punishment/discount for unfair trade practices was $2.40 per pound. Thus, negative information concerning trade practices had almost twice the impact of positive information on the coffee consumer’s willingness to pay.
For the t-shirt experiment, potential consumers of cotton T-shirts were divided at random into five groups.
The first (100% Ethical) read the following: “Conventionally grown cotton uses more insecticides than any other single crop and epitomizes the worst effects of chemically dependent agriculture. Each year cotton producers around the world use nearly $2.6 billion worth of pesticides — more than 10% of the world’s pesticides and nearly 25% of the world’s insecticides. Danisky is the leading textile and clothing company based in the European Union specializing in organic cotton outdoor wear for active people. Growing cotton organically entails using cultural practices, natural fertilizers, and biological controls rather than synthetic fertilizers and pesticides. Danisky has been recognized for its outstanding environmental record. All of Danisky’s products are 100% organic.”
The second group (50% Ethical) had the same information, except that: “All of Danisky’s products are 50% organic.”
The third group (25% Ethical) had the same information, except that: “All of Danisky’s products are 25% organic.”
The control group was given no ethical information at all.
Consumers perceived (and rewarded) all levels of ethical production similarly. They did not reward increasing levels of ethical production with increasing price premiums. Our results suggest that once a certain threshold is attained, additional ethical acts or increased ethicalness simply affirms the target company’s position within that category and will not change consumers’ willingness to pay.
So in the end it pays to be good. I am sure that is a message that all companies should hear.
These are the authors conclusions:
Consumers are willing to pay substantially more for ethically produced goods than for unethically produced goods, suggesting that there is a financial reward for socially responsible behavior. The managerial implications of these findings are clear: Act in a socially responsible manner and you may be able to charge more for your products. Perhaps it is even more important to note that consumers will punish the producer of unethically produced goods to a greater extent than they will reward a company that offers ethically produced products. The negative effects of unethical behavior have a substantially greater impact on consumer willingness to pay than the positive effects of ethical behavior. Consumers may still purchase your products if they are unethically produced, but they will only do so at a substantial discount.
So, not only does it pay to be good, you may be punished if you are bad.
- Winter 2009 edition of the MIT Sloan Management Review
- Does It Pay To Be Good? by Remi Trudel and June Cotte (free registration required)