Persuading Consumers to Pay More for Sustainable Products
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.