Consumers are willing to pay more if they know the reasons
Today, the world is experiencing a growing trend of responsible consumption, which implies a conscious decision to choose products and services that have a lower negative impact on the environment and society. The formation and development of the category of responsible consumers today have a significant impact on the activities of companies around the world.
At the same time, sustainable production and consumption is an independent goal among the main 17 "Goals for achieving sustainable development", adopted in September 2015 at the UN Summit on Sustainable Development, thus emphasizing their critical role in addressing the environmental, economic, and social problems.
In terms of growth, the market for eco-products can be characterized as young, not mature, the real capacity of which is far from potential. At the same time, Western countries have at least thirty years of experience in this market. The activities of all market participants are regulated, the legislation is debugged not only at the national but also at the international level.
Production of environmental goods
The production process for organic products is designed to minimize environmental and social impacts while still making them economically viable. The reason green products tend to be more expensive has to do with the implications for the supply chain. It is not easy to manufacture products with minimal environmental impact, and the additional costs come with a higher degree of complexity. Kearney’s research shows that organic products are on average 75-85% more expensive, with the level of mark-up highly dependent on the product category.
It is important to note, however, that an analysis of the average cost of goods shows that 10 to 30% of costs are spent on the first stage of the value chain. These costs include:
- Product markups. Surcharges for the actual higher cost of producing organic materials, including more expensive labor, lower yields, more space to raise animals, and longer animal raising times
- Certification allowances. Markups resulting from approval and certification documentation, e.g., for organic or fair trade
- Volume markups. Mark-ups caused by small quantities of organic food compared to non-organic food and the need to store them separately (reduced economies of scale)
Other costs associated with the sale of goods are 10-15%. As for the fees of wholesalers and retailers of goods, they range from 60-65%. Most often, these costs include marketing as well as additional certification, but in most cases, these costs increase the seller's margins.
Based on the above facts and other considerations, it takes additional time and money to produce an environmentally friendly product. From the sourcing of raw materials to the delivery of the final product, almost all steps in the process of producing organic products are more expensive than traditional products.
Consumers are willing to pay more if they know the reasons
According to a Nielsen study, consumers across all regions, income levels, and categories are willing to pay more for green products. The level of potential willingness of consumers to pay more for the products of companies that are responsible for society and the environment is more than 80%. At the same time, in developing countries, Millennials (ages 22 to 35) and generation Z (ages 16 to 21) are willing to pay the highest prices.
Kearney estimates that about 70 percent of all consumers will pay 10 percent more for green products, another 15 percent will pay 30 percent more, and another 15 percent will pay even higher markups. Consequently, a 10 percent markup is likely to be well received in the mass market and could significantly increase the adoption of organic products.
It is important to note, however, that if customers want to shop in an environmentally friendly way, many cannot afford or simply do not want to spend much more. This creates a gap between the stated intention of consumers to act sustainably and their actual behavior.
How to create more affordable prices
The solution to the problem is to adjust pricing at the end of the value chain, shifting the corporate thinking and accounting logic from relative to fixed margins. This will allow for sustainable production in the form of a fixed cost premium rather than multiplying it throughout the value chain.
If brand owners, wholesalers, and retailers add a fixed margin (their absolute cash return) and switch to a sustainability markup, the final price will often be in the consumer's acceptable range, namely the markup of 10%.
An added benefit will be the benefits of sustainable production, namely government incentives, such as tax breaks, can help promote green products and expand their production, and save resources in production.
How to promote eco products
Having carried out the production of eco-products, it is necessary to correctly plan marketing support and communication with the consumer. When promoting eco-friendly products, many marketing professionals see saving the planet as enough argument for the shopper. But comfort, safety, aesthetics, accessibility, status, pleasure are equally important.
According to the American Marketing Association, "green marketing is the marketing of products that are considered environmentally friendly." Green marketing involves a wide range of activities, including product modifications, manufacturing process changes, packaging changes, and advertising changes. Green marketing aims to meet the needs and desires of customers without harming the environment or with minimal harm to it.
Terms such as phosphate-free, recyclable, reusable, ozone-friendly, and environmentally friendly are some of the things consumers most often associate with green marketing.
Eco-certification plays an important role in this. It testifies to the seriousness and progressiveness of the company, its ability to maintain the environmental characteristics of products at a consistently high level, and strengthens the company's image in the eyes of the consumer.
Eco-labeling is a tool that allows you to assess the environmental friendliness of a product based on a multi-criteria assessment system and convey this information to the consumer in the most convenient legal form. In a highly competitive environment, a product with a corresponding mark receives additional cost-effective conditions. The concept of eco-labeling is governed by the ISO 14020-25 series of international standards "Eco-labels and declarations", including specially developed guidelines and procedures for use.
Around the world, environmental labels and ecolabels help the buyer, without being an expert, to choose an environmentally preferred product. They play an important role in the development of ecological production and consumption, enable the producer and the consumer to speak the same language, and also contribute to the development of the market for eco-products, creating favorable conditions for their promotion on the market. Today, there are a huge number of different environmental signs and ecolabels, the schemes of which are systematized in international ISO standards and reduced to three types - I, II, and III.
It may seem to the manufacturer that the transition to green marketing is costly, but, in the long term, such a transition is beneficial and irreplaceable. Companies that are better versed in environmental issues have already or are transitioning to green marketing. More and more business people are realizing the link between environmental responsibility and more efficient and profitable business practices.
Market conditions and customer preferences affect product sales and a firm's profits. With so many options available in the market for shoppers, it is difficult for marketers to maintain brand loyalty. Brand loyalty is waning day by day, and the number of customers who think certain brands are worth paying for is also decreasing. In such a competitive environment, customers are more likely to buy green products because customers prefer products and packaging that can be recycled or disposed of safely without harming the environment.
While sustainable production requires higher prices, retail prices for these products can be much lower than what we see today. Instead, pricing strategies discourage consumer acceptance of green products, widening price differentials and widening the green gap. Companies that are rethinking the rules can offer green products at a much more competitive price, while still maintaining the same profit margins for everyone in the value chain. However, this will require a collaborative approach and a willingness to work together for a more sustainable future.
At the same time, an important factor is the awareness of buyers with the help of ecolabels, this will give them a more accurate picture of the market and, in the future, will increase the demand for ecological goods, which in turn will lead to a decrease in the production price.