The “Green” Premium and Organizational Responsibility

If there is determined to be value in producing products that are conscious of environmental impact, then business should embrace the virtue of reducing those harms and cost externalization.  In a recent article, “The Secret to Getting a Green Premium,” there is noted a divide between what consumers state as their preferences and exhibited marketplace behavior.  Is it merely a matter of tastes and preferences, and thus there is nothing morally reprehensible regarding firms that continue with “business as usual” in light of low sales of their “green” products?

Is it that business is absolved of responsibility because they are merely providing what the consumer wants?  Considering that organizations employ legions of people to analyze and track consumer preferences this position is without merit.

However, a fundamental flaw belies this approach.  Environmental responsibility should be viewed as a virtue to be praised when upheld or advanced and condemned if ignored.  A firm that offers a “green” product extension to compete alongside the “not-green” alternatives is operating under an implied assumption that it is merely a matter of tastes and preferences, while ignoring any environmental responsibility to the impacts of products and pushing the choice off on the consumer as a matter moral judgement.  If the choice were between a garment made with slave labor and another that is produced under ‘fair trade’ conditions, then the choice is between one that is clearly wrong and another that is ‘not-wrong’.

However, the issue is more complex than organizations noting that consumers are not all shifting to environmentally conscious alternatives.  Behavioral economics has shown, the execution of choice is rarely one of conscious and rational evaluation of alternatives.  More often choice operates within a context of great manipulation and influence that compels consumers to look for the easy way out, and frequently subconsciously.  The article cites an excerpt of  No, Consumers Will Not Pay More for Green to make a categorical claim against offering “green” alternatives that cost more than the “not-green” options:

“Consumers will consistently tell surveys that they are willing to pay more for socially and environmentally superior products…A major utility company, for example, surveyed rate payers asking if they would pay a small premium for ‘green electricity.’ The response was overwhelmingly ‘Yes!’ However, when the product was offered, fewer than 5% actually signed up.”

The fundamental flaw here is that the consumers demonstrated a view that ‘green electricity’ was of value and desirable, but then the provider required them to ‘sign up’ to align their ethical sentiments with the actions of their electricity consumption.  A failure of the utility provider is laid bare when considering that the ethical action would have been to change over to a default position of providing all with ‘green electricity’ and requiring dissenters to ‘opt-out’ for savings.  Dan Ariely’s Predictably Irrational illustrates this repeatedly through many examples of consistent patterns of what would otherwise be termed as irrational behavior.  Tellingly, it is when the execution of choice is complex and difficult we frequently opt for whatever the default choice is.  If the utility had switched to all “green electricity,” then it is very likely that the result would have been just 5% opting out of the switch.  If one needs evidence of the power of default choice, then look no further than studies regarding organ donation.

Furthermore, a strategic issue underlies such a myopic view of business as merely responding to preferences.  If the utility firm switches to all “green electricity” then the result is  a strategic decision to realign their business with the preferences of their customers AND the empirical evidence of climate science.  While some may prefer the short term gains of continuing the status quo that marginalizes those wishing to align their ethics with actions, the day of reckoning appears to be coming for those that chose to ignore climate science. The innovative firm does not wait for the necessity of regulation to compel their action, otherwise dumping pollutants into the rivers is a perfectly fine cost externalization until government, or court litigation, mandates that it is not.  The failure to anticipate and proactively take action merely opens opportunities for usurpers to displace the “old guard” of outmoded and linear based economic thinking.  The threat of new market entrants may be small for utilities, but most other organizations are not so lucky to operate in an insulated competitive arena.

So what should the firm do that has the option of offering a “green” product?  Is the ethical question one of merely offering a choice between a responsible product and a less-responsible product?  How much of a burden is it to the consumer to have to evaluate and weigh the benefits of every item on a grocery shopping list?

If we are to merely accept that consumers are unwilling to pay a premium for responsibility in the marketplace, assuming that the “green” option is more costly than an alternative, then by entailment consumers should have no problem with conflict diamonds, sweatshop produced apparel, or new construction of fossil fuel burning power plants.

However, the thrust of the article is that business marketers need to formulate compelling stories to underlie and differentiate products.  Effective messaging entails storytelling, but also other components, such as simplicity, unexpectedness, concreteness, credibility, and emotional connection.  Chip and Dan Heath’s Made To Stick focuses on the components of effective messaging, easily recalled as S.U.C.C.E.S., to embody the aforementioned components along with storytelling.

Generically, storytelling is likely to intuitively incorporate the other components of effective messaging.  However, we need to differentiate between “good” and “bad” storytelling.  While the article is aimed at compelling consumers to care about “green” alternatives, however it is also the producers responsibility to weigh the morality of continuing to offer the non-green option.  Furthermore, compelling care does not fully entail a correlative choice.  Personally, I prefer an environmentally friendly option, however keeping the information channels clear of clutter and misinformation is nearly as important as anything else.  When offered more than 10 choices, studies  have shown that we begin to overload our cognitive capabilities to evaluate alternatives and begin to make inferior selections, thus the restaurant menu with 200 selections is not likely to compel a consumer to make the choice that delivers the most satisfaction.  Additionally, misinformation clouds and crowds out truly green options, such as the case of selecting free-range eggs that are not really produced with the animal’s welfare in mind.  Labeling that is misleading confounds the consumer, such that even in attempting to choose amongst alternatives it may not be clear as to why two seemingly “green” options differ in price significantly.

Furthermore, categorical statements that consumers are unwilling to pay for a premium for green products evidences a simplistic thinking that customers, shareholders, stakeholders, and management should roundly reject.  A CEO that operates with a categorical view of consumers, like the one above, without understanding why there is a divide between desires and actions provides a good basis for considering their replacement.

The proper question, assuming the “green” option is more costly, is to identify the threshold that consumers are willing and able to pay to select an environmentally responsible alternative.  If the cost is negligible, then there is no good reason to prefer the option that harms.  If the cost differential is great, then it may be other factors compelling the choice of then harmful alternative.