Sustainable Brands Should Not Use Cost to Set Pricing
Companies deciding to venture towards a more eco-friendly model need to view the added cost of doing so not as an expense, but as added value — then communicate that to their customers. The marketing team makes that happen. By first incorporating the customer’s sustainability requirements into the product offerings, marketing then translates that added value into a monetary value the customer assigns to it, conveying it to them with a price they are willing to pay. Ultimately, their goal is to ensure that the price is neither too high nor too low.
Viewing Sustainability as Added Value
The Top Barriers to Buying Sustainable Brands
Price premium: Globally, consumers cite price premium as a leading barrier to buying sustainable products.
Lack of awareness and trust, and confusion about sustainability claims: Lack of awareness, as well as trust issues and confusion about claims, are also top deterrents.
Source: The Conference Board - Global Survey Asks 30,000+ Consumers About Views on Sustainability (Feb 2020)
According to a survey of consumer views on sustainability by the Conference Board, two factors hinder the purchasing of sustainable products: the price premium and lack of consumer awareness. This is probably not surprising to companies producing more sustainable products. At the same time, "NYU Stern’s Center for Sustainable Business performed a study in which they discovered that 50% of CPG growth from 2013 to 2018 came from sustainability-marketed products. This suggests that many customers are moving away from less eco-friendly products and “voting with their dollars — against unsustainable brands.” (Source: Research: Actually, Consumers Do Buy Sustainable Products).
What does this mean for companies pursuing a more sustainable business model?
First, existing brands should realize their customers need to understand the value being offered — is the price they are paying worth it? Therefore, pricing should be based on the brand or product’s value proposition - not cost.
“For a company like ours, pricing is largely driven by cost structure.”
There is no doubt that companies employing sustainability practices may realize higher costs due to their efforts. Sustainable packaging company — EcoEnclose — provides an interesting example of sustainability and pricing in which they explicitly state that cost structure drives their pricing.
Yet, further reading on that page reveals that the real basis for their pricing strategy is the value chain they provide their customers. As their website states: “EcoEnclose has made informed decisions we believe are essential to living out our commitment to sustainability and offering our customers value and transparency in the form of true eco-friendly packaging.” Specifically, they offer the following seven unique selling points:
They offer “Source Verified and Consistent Recycled Content.”
They have mastered the “Impact of Manufacturing with Recycled Content.”
“Where Items Are Manufactured” is in the United States.
Their “Size of Business and the Type of Operations” — independent nature and smaller size directly translate into increased customer service commitment.
They provide leadership on sustainable “Innovation and R&D”
Their products offer many “Features and Functionality”
“Your Brand and the Customer Experience” benefits from their packaging options serving as the first tangible impression a company will make on their customers.
Therefore, instead of treating these expenses as costs, they should view them as added value for their clients. Rather than explicitly stating why their prices are higher, they could emphasize their unique selling point derived from their sustainability choices. (which, perhaps is the intent of the page)
A simple syntax change – replacing “cost structure” with “value chain” could change EcoEnclose’s discussion.
EcoEnclose is a leading sustainable packaging supplier
Aligning pricing strategy with the unique value proposition of sustainability can help encourage customers into paying more for sustainable products.
Companies deciding to venture towards a more eco-friendly model need to view the added cost of doing so not as an expense but as added value — then communicate that to their customers. The marketing team makes that happen. By first incorporating the customer’s sustainability requirements into the product offerings, marketing then translates that added value into a monetary value the customer assigns to it, conveying it to them with a price they are willing to pay. Ultimately, their goal is to ensure that the price is neither too high nor too low.
Other topics in marketing and sustainability
Persuading Consumers to Pay More for Sustainable Products
Pricing sustainable products begin with a unique selling position that consumers can translate into the value they seek at a price they are willing to pay. The marketers’ job is to always focus on the value being offered and understand the factors that will influence consumers' perception of price. Companies must acknowledge that sustainability will impacts costs – both positively and negatively. Yet, they should not set prices based exclusively on their expenses. Instead, focus on the offered value and charge accordingly.
coupling pricing strategy with Sustainability’s Unique Value Proposition
According to Nielson in “THE EVOLUTION OF THE SUSTAINABILITY MINDSET”, consumers are 50/50 on their willingness to pay more for sustainable products. This reality provides a challenge to many companies who wish to offer more sustainable options. With nearly half of their potential customer base not willing to pay higher prices for these offerings, brands must determine the best pricing strategy that will attract the most people. Although a reasonable question might be “how do I get them to want to pay more?” a better approach might be to ask how we should “demonstrate sustainability’s unique value proposition.” Unfortunately, that may mean offering a price that is aligned with the value they currently perceive. But that doesn’t mean they will not pay more in the future as they become more aware of the value they will receive.
How and when you choose to raise prices is an equally important part of pricing strategy. According to Rice University’s Vikas Mittal, “Price increases, done incorrectly, often result in customer dissatisfaction and brand switching.” In a 2016 American Marketing Association article, he provides four specific levers designed to help companies create customer-based strategies for raising prices (See infographic). Brands seeking to increase product prices because of sustainability initiatives should consider these suggestions to address customer price sensitivity.
Pricing for Value
Brands need to avoid myopically developing pricing strategies based on the “sustainability” merits. Companies employing socially responsible practices still need to price strategically and should not assume consumers will accept a price premium because of sustainability. They must ensure the value offered meets customers’ needs and that the price accurately reflects it. Before setting prices, marketers should also consider the following:
Elasticity of Demand
Reference Pricing
Branding
Sustainability Pricing Strategy Considerations
Elasticity of Demand: Products with elastic demand will realize a loss of sales as price increases - even if the offering is more sustainable than the alternatives. Items with inelastic demand, however, are not price-sensitive, which allows marketers to adjust prices upward. Understanding these sensitivities can empower marketers to make better pricing decisions. Ideally, marketers should focus on developing sustainable products with inelastic demand. Yet, if consumers view products as commodities, then it becomes more challenging.
Apple is a good example of how Elasticity of Demand, Reference Pricing and Branding impact pricing strategy for the computer and smartphone market.
Reference Price: Consumers compare an offering price to what they perceive to be a fair price for that product. This comparison is typically a range. Where that range falls depends on the type of item. For certain items, this range could be extensive or be dependent on the sales channel. For commodity items, however, the perceived fair price range can be quite narrow. Understanding consumer reference pricing is crucial in determining MSRP.
Branding: Related to reference pricing is branding. It is not uncommon for consumers to consider some brands pricier than others. Marketers need to consider their brand’s positioning when deciding on a sustainable product pricing strategy. If a consumer does not perceive a brand as a premium-price one, it may become harder for them to introduce higher-priced offerings. On the other hand, it may be the perfect time to consider repositioning the brand by offering a new value proposition to customers.
It is Challenging
With the rise in consumers accepting sustainability, the marketing team’s role in pricing decisions becomes even more critical. Failure to include them may very well end up in a loss of sales and profitability. While a significant majority of consumers are ready to purchase sustainable items, there are far fewer who are willing to pay more to buy them. Although this paradox is not unfamiliar to companies, it does create a perplexing challenge – “How can we offer these products for our customers to buy?” Business managers cannot answer by saying, “We will charge more.” Embracing sustainability is a strategic choice that requires proactive marketing, which begins with product development and extends to price. Strategic pricing is not easy, and including sustainability in the value proposition creates additional complexity for companies to consider.
Pricing sustainable products begin with a unique selling position that consumers can translate into the value they seek at a price they are willing to pay. The marketers’ job is to always focus on the value being offered and understand the factors that will influence consumers' perception of price. Companies must acknowledge that sustainability will impacts costs – both positively and negatively. Yet, they should not set prices based exclusively on their expenses. Instead, focus on the offered value and charge accordingly.
It is promising to note, however, that price parity between sustainable and less-sustainable products is starting to occur. This new reality is allowing for sustainability to become more price-competitive. As a result, brands may be able to reach more consumers – especially the 51% not willing to pay more. This fact does not necessarily mean consumers will convert to these greener items. As a result, the marketer still has more work to do.
Other topics on marketing and sustainability
Branding and the Marketing Mix
Most companies understand how promotion and branding are related, but what about the other 3 P’s in the Marketing Mix?
Most companies understand how promotion and branding are related, but what about the other 3 P’s in the Marketing Mix?
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Anyone that has ever taken a marketing class will remember learning the marketing four P's, Product, Price, Place, and Promotion. These four pillars of the marketing mix are the foundations for any marketing degree. They are at the root of what any marketer should consider when creating a marketing strategy.
It seems, however, that when companies get into the nuts and bolts of their marketing, many marketers lose sight of the basics. Companies perhaps too heavily focused on Promotion, lose sight, or even relinquish control of the remaining three P's to other parts of the organization. This oversight is extremely myopic for any company, but especially counterproductive when trying to build a brand.
The consumer establishes a brand’s value in the market. Consequently, a brand’s effectiveness directly determines the success of its promotional efforts. The importance of Promotion, therefore, rarely eludes most companies when it comes to brand development. What is less obvious, is the role that the other 3P's play in creating brand value. Influencing consumer brand perception relies on the strategic decisions made regarding Product, Price, and Place.
Below are three strategic insights that marketers should consider when creating a brand.
Beyond the Core Product
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While teaching a Principles of Marketing course, I discovered fresh insight into Phillip Kotler's three levels of product. Unlike Kotler’s viewpoint, this new strategy perspective describes product offerings as follows:
Core Product: represents the solution for sale—the form/function utility that creates the set of benefits that allow it to fill a need.
Expanded Product: includes the mix of tangible attributes and intangible product support.
Product Concept: describes the product in terms of the market niche to be served, the life cycle it will experience in the marketplace, and the impact of manufacturing and selling it on the company itself.
(Source: Principles of Marketing and Personal Selling – edited by Miguel Sahagun)
Most, if not all, companies understand the core product concept. Beyond that is this idea of the expanded product: what does the product include that allows it to stand out or differentiate itself from other products in the same category? These factors could be anything that adds either tangible or intangible value, such as the type of packaging used to warranties or even just the ease of possession by the consumer (e.g., payment plans and delivery options). Again, many companies understand this aspect and apply it to their product marketing strategy. Even more broadly, however, is the product concept perspective. This strategic choice is where brands truly start to differentiate themselves in the branding process. It can be especially powerful if the brand can create a new product classification as a result - think Apple iPhone's creation of the smartphone category. Another great example is how Smartwool created the performance merino wool outdoor sock category.
By applying the Product Concept, Smartwool created a new category: Technical Performance Outdoor Socks
Image: Smartwool Socks on display at Great Outdoor Provisions Co in Winston Salem, NC (Credit: David Petri)
Smartwool started back in the early 1990s - founded by a couple of ski instructors. They wanted to make better ski and hiking socks (Core Product). To differentiate, they chose New Zealand Merino wool. Merino wool offered not only the traditional properties of wool (insulating even when wet), but unlike coarser wool, it was not itchy. Additionally, they used shrink-treated yarn, which allowed consumers to dry their socks in a dryer (Expanded Product). What ultimately set them apart was the premium price they charged. At $20/pair, Smartwool challenged the conventional wisdom at the time - the idea that consumers would not spend that much on a pair of wool socks. Indeed, the outdoor industry scoffed at this when the brand introduced itself at the Outdoor Retailer trade show in 1995. Yet after retailers discovered the value that consumers would receive with Smartwool, the brand took off. As a result, Smartwool had created a new outdoor sock category - Premium Technical Performance Socks (Product Concept). Twenty-five years later, the brand maintains a greater than 50% market share for socks in the outdoor specialty retail channel. Today, multiple premium outdoor sock brands are competing in this category, including brands like Darn Tough, Point6, Fox River, and Farm to Feet.
(Source: Company Week: Smartwool by Chris Meehan)
Make Sure the Price is Right
Perhaps the easiest way for many companies to determine price is by marking up product costs with a target profit margin. Most marketing professionals, however, will state that's not how you create a pricing strategy. A detailed discussion on pricing strategy is a separate topic itself with countless articles on pricing that demonstrate how this approach risks leaving money on the table. Marketers must recognize that Price impacts branding. As a result, they need to consider three primary issues: Reference Pricing, Strategic Objective, and Pricing Strategy.
All consumers maintain a reference price for most goods and services. This comparison typically manifests itself as a range of acceptable prices. Brands entering an existing category need to be sensitive to this and ensure that their offering falls within that range. Consumers may draw premature conclusions about the brand if the offering price is at the extremes. If too low, then quality and value may be questioned. In contrast, if too high, consumers may not even consider the offering. Perhaps the rare exception to this is if the brand can create a new category as Smartwool did with socks and Apple did with the iPhone.
Next, brands need to determine their strategic objective regarding pricing decisions. Most marketing literature details two specific pricing strategic objectives:
Profit Maximization - the aim is to generate the highest net income over time. All sales need to ensure that acceptable profit margins are maintained.
Volume Maximization - the primary objective is to generate as much sales volume (and revenue) as possible. This objective creates cash flow at the risk of lowering profits or operating at a loss.
(Source: Principles of Marketing and Personal Selling – edited by Miguel Sahagun)
Volume maximization may be appropriate for commodity offerings in which narrow profit margins are the norm for the category. Yet, I would argue that most brands are seeking long-term growth, which requires investment to increase brand awareness, market penetration, and growing brand loyalty. The best strategic pricing objective, therefore, is maximizing profits.
There are multiple pricing strategies out there. Some brands employ skim pricing, charging a high price to attract a particular consumer or to exhibit a specific value to consumers. This approach primarily works for luxury or premium brands. Other brands go with a price penetration strategy, which is employed to generate sales. In this situation, the company is more likely seeking volume maximization. A new brand looking to compete in an existing category, though, should consider neutral pricing - aligning your price with the competition. Brands using this approach are less likely to turn away potential consumers by being too expensive or leave money on the table at a lower price.
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Beyond matching competitors' prices, neutral pricing requires two critical steps before implementation. The first is that the brand’s differentiation has to be crystal clear. Next, brands need to research the market and determine its positioning among the competition. These two steps, coupled with price parity, allows brands to offer a unique selling proposition to consumers. This competitive differentiation provides your potential customers with more value at the same price. Without it, consumers are less likely to consider your offering.
When I was VP of Marketing for Farm to Feet, we applied a neutral pricing strategy. Our goal was to be a premium sock brand with a 100% American made value proposition. We set our prices on par with our closest competition by evaluating brands such as Smartwool and Darn Tough. Pricing our products on par with existing premium outdoor performance wool socks allowed us to leverage the current perception of these known brands. Ultimately, Farm to Feet justified its premium pricing using the brand's competitive difference, securing its place in the category.
Place is not Just a Location
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Traditionally, many people think that Place, from a marketing perspective, refers to the sales channels or specific "Retailers." And for a long time, that was probably the prevailing mindset or thought. Today, however, marketing courses are teaching that Place refers to the overarching value chain. More and more, companies are including both the product's supply chain and the distribution channel in the marketing mix. Brands seeking to be more transparent with their customers recognize the value of this approach. For some companies, the product's supply chain is an essential branding attribute. Choosing the right suppliers can be as important or, in some cases, more important than the distribution channels in creating brand value. Being aware of that can improve the brand's image.
Icebreaker made supply chain part of its brand - inviting consumers to learn about the source of the Merino Wool used in its products.
Image: Merino Wool Ranch that supplies Icebreaker located on the South Island of New Zealand (Credit: David Petri)
The brand Icebreaker provides an excellent example of employing the value chain in the company's branding. Icebreaker is a Merino New Zealand based apparel brand, now owned by VF Corp. Using New Zealand Merino wool, Icebreaker created a whole line of apparel, including everything from base layers to outerwear and accessories. For several years, they included what they called a "Baacode" - a distinct number on every product package. Using this code, customers could enter the code on the brand's website, and learn about one of the Merino wool ranches in New Zealand. Currently, their website provides a robust supply chain story. This commitment to transparency results in the product supply chain becoming an essential part of the Icebreaker brand image.
The 3P's of branding
Strategic marketing decisions regarding Product, Price, and Place play an important role in a brand’s image.
A well-executed marketing mix is essential for any company's strategy. Equally important is recognizing the role the 4P's has in branding, and to not lose sight of how they fit into a brand narrative. Consumers ultimately dictate a brand's value in the marketplace, which in turn determines how powerful its Promotion will be. To sustain this, companies need to make strategic marketing decisions regarding the other 3P's to influence their brand identity.
Successful brands understand that Product requires thinking beyond their core product. Competitive differentiation stems from also creating an expanded product perspective as well as developing a product concept. Ideally, brands that position their offering with a product concept that creates a new category can become a market leader.
Brands that effectively use Price neither turn customers away nor leave money on the table. Neutral pricing is an optimal approach for new brands to consider - especially when trying to compete in an existing category. To be effective, however, a unique selling proposition is required.
Finally, brands need to consider the entire value chain when developing its Place strategy. A transparent supply chain allows brands to be more authentic, which increases the value consumers will bestow on your brand's image.