Does It Pay To Be Good?

In surveys, customers have long claimed that they’d pay more for ethically produced goods. But is that what happens when they actually buy things? New experiments offer answers.

A large consumer products company has decided to diversify even further by launching a chain of bistros. While trying to determine how it might distinguish itself from its competitors, the chief marketing officer (CMO) suggests a socially responsible differentiation strategy.

“We could sell ethically produced goods, fair-trade coffee and chocolate, in addition to offering locally produced organic fruits, vegetables and meat,” she suggests.

Knowing that ethical sourcing is likely to increase costs, the company faces some crucial questions: If it pursues a fair trade and socially responsible differentiation strategy, what sort of consumer will it appeal to? Will consumers pay enough extra in price to recoup the greater cost of production? Do all the products need to be fair trade? If less than 100% of them are fair trade, can the company still maintain its socially responsible positioning?

The leading question

Consumers say they like the idea of purchasing ethically produced goods. But will they pay more for them? How much more?

Findings
  • Yes, customers will pay a premium for ethically produced goods.
  • Conversely, they will punish companies (by demanding a lower price) that are not seen as ethical.
  • The punishment exacted is greater than the premium customers are willing to pay.
  • Companies needn”t be 100% ethical to be rewarded.

The era of self-interested companies trying to maximize shareholder wealth at any cost appears to have been supplanted by an era of corporate social responsibility, a phrase used to describe a decision by the company’s management to consider the impact their decisions will have on their customers, employees, suppliers and communities, as well as their shareholders.

But as companies consider and strive to limit the negative impact of their operations on society and the environment, some questions remain unanswered: Are consumers willing to reward companies for their positive actions? Will consumers punish them for unethical acts by discounting how much they will pay? And how ethical does a company really need to be to be seen as ethical by consumers? (See “About the Research.”)

About the Research in this article »

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References

1.W.G. Simpson and T. Kohers, “The Link Between Corporate Social and Financial Performance: Evidence from the Banking Industry,”

4 Comments On: Does It Pay To Be Good?

  • apeterson | March 25, 2009

    This is good and important study. Retailers need to know the volumes of goods which the acceptable pricing applies to.

    Alice Peterson
    Syrus Global

  • derek mcahon | July 13, 2010

    Yes, I’m not sure the world needs another chain of bistros. The ethical and fairtrade idea was much better.

  • annw | May 10, 2011

    People like to do business with those they know and trust. Ethical, fair trade businesses earn this trust faster than businesses that don’t factor this in. Perhaps the results are not always immediately evident, but in the long run ethical practices translate to more dollars.

  • Hillary Mitchell | September 29, 2011

    I agree with annw. I think this lesson can translate into life as well: If you do the right, ethical thing–eventually you will be rewarded. Granted, there are probably some cities where this type of business wouldn’t do well. But doing a little market research beforehand could truly make a business like this successful–and eventually (hopefully) could possibly start a consumer trend in loyalty to these types of companies.

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