Pocket change: Environmentalism could beat glitz in advertising for digital sellers

February 07, 2013

It’s tough to differentiate yourself in online retailing. After all, you don’t have a physical location for people to check out or salespeople to build face-to-face rapport. Your advertising and digital image must draw your buyers in.

Should your company strive to convey a hip image? Authoritative? More affordable than your competitors? According to Robert St. Louis, your company might want to invest in environmentally friendly practices and then put marketing money into publicizing them.

A professor of information systems at the W. P. Carey School of Business, St. Louis teamed with W. P. Carey colleague Benjamin Shao and Joseph Cazier of Appalachian State University to explore green business and online price premiums. Would consumers pay more to purchase from environmentally friendly companies? That was the question the researchers set out to answer.

As it turns out, consumers were willing to pay more for items when the company selling them had a reputation for environmental stewardship. More important, a large number of consumers punish environmental transgressions by shunning perceived polluters. “What really amazed us was how strong the penalty was,” St. Louis recalls. In one scenario tested, 42 percent of consumers said they wouldn’t buy at all from a company with a record of mistreating Mother Earth.

Toxic waste

Companies that exploit the environment may be taking that stance as a cost cutter, but the research St. Louis, Shao and Cazier conducted shows that razing natural resources could have a high cost through lost revenues. To uncover this finding, the researchers used a vignette or scenario study in which they asked participants to name a price for items sold by a fictional online retailer called Media Magic. Study participants had to name the price they’d pay in light of three different descriptions of this same fictional company.

In one scenario, participants were told only a few basics about Media Magic. They learned that the company was founded in 2001 and had more than $100 million in annual sales. The description also revealed that Media Magic was highly rated by consumers, easy to engage with and that it had a wide selection of digital music, books, and movies available to download. Based on this information, study participants had to say how much they’d pay for a song, movie or MP3 player from the company.

In the next scenario, environmental stewardship came into play. This time, study participants were told to imagine they’d read an article in a favorite magazine. It informed them that Media Magic avoided use of toxic elements in their electronics, used renewable energy whenever it could, invited environmental groups to audit company practices and donated a share of profits to environmental causes.

In the last scenario, Media Magic was an environmental villain. The company used toxic elements freely in production of its offerings, dumped waste willy-nilly, located factories in third-world countries to avoid pollution-control laws and lobbied Congress to loosen environmental regulations here in the U.S. Environmental groups protested the company’s activities and regulators regularly levied fines.

These different company descriptions resulted in very different consumer willingness to pay. When comparing an environmentally friendly Media Magic to the neutral one, consumers said they’d pay 27 percent more for a song, 14 percent more for a movie and 8 percent more for the MP3 player. The difference was even larger when consumers compared the environmentally unfriendly Media Magic to the one that earned environmental kudos. In that case, the price premium for environmental stewardship was 19 percent, 13 percent and 36 percent for the song, movie and MP3 player respectively.

But, as St. Louis said, the real surprise was the penalty for environmental malfeasance. When comparing the company wearing an environmental black hat against the one wearing a white one, 36 percent more consumers wouldn’t buy a song, 39 percent more would pass on the movie and 42 percent more said wouldn’t buy the MP3 player. Presumably, when these consumers wanted these items, they’d find the good-guy company to buy from.

Why green behavior begets greenbacks

“It makes sense,” says St. Louis when he considers the extent of the consumer penalty for environmental misdeeds. Paying a price premium for the chance to buy from a company known for strong environmental stewardship takes effort, he says. “It takes a willingness to pay more. But, to refuse to buy from someone who is environmentally unfriendly doesn’t cost you anything.”

This, he adds, is particularly true online, where search costs are negligible. “In the digital economy, it’s really easy to switch from one provider to another. Location is unimportant. It’s not a matter of one store being more convenient than another.”

Online, trust also is an important factor in earning sales. “If you’re walking into a store, you see a sales person and the structure itself,” St. Louis says. “That tends to give you some confidence in the organization.” Since online retailers don’t have that advantage, they need to do other things to engender trust, which is crucial for turning browsers into buyers.

“When people see that a company is acting responsibly with respect to the environment, they’re likely to assume the company also acts responsibly toward its customers,” he maintains.

This, St. Louis believes, is even more important in a business-to-business context than it is in the consumer marketing realm, particularly for those companies that are marketing services. “When you’re purchasing services, you’re really dependent on your trust in the provider,” he says.

Unlike consumer transactions, business-to-business deals often involve long-term relationships. “There are costs to setting up that relationship and there are costs involved in terminating it,” St. Louis continues. A lack of care for the environment signals a short-term versus long-term orientation, he adds, which is why he thinks B-to-B buyers would be even more unlikely to buy from an environmentally unfriendly seller.

Corporate relationships are one of the reasons St. Louis pursued this line of research in the first place. “I was reading an article one time about Michael Jordan. It said that he was paid more by Nike than all 5,000 of the people who actually made the shoes in Malaysia combined,” he recalls. “It got me wondering. Instead of giving money to athletes for endorsements that are essentially meaningless, would companies get more payoff by doing things that are good for society and promoting those efforts to project a positive corporate image?”

Given the results of this recent research, perhaps being environmentally responsible would have a better return on investment than endorsements, gimmicks and glitz. And, perhaps the environment is just the cause to support for profitable corporate benevolence.

“Initially, we looked at testing scenarios where a company was pro-life versus pro-choice, but people have extreme views with respect to that,” St. Louis says. Ideally, St. Louis, Shao and Cazier wanted to test a cause that had wide relevance but wasn’t polarizing. Those factors are what made the researchers chose the environment as the cause célèbre for their fictional company. “The environment impacts everyone,” St. Louis notes. “We couldn’t come up with any other cause that would be as widely applicable.”

Bottom Line

  • For online retailers, image is everything. Trust tops convenience in getting consumers to buy.
  • In recent research, telling consumers that a company was known for strong environmental stewardship enabled buyers to charge a price premium on entertainment items.
  • In the same study, buyers were willing to boycott a company they perceived to treat the environment badly.
  • These reactions could be even more pronounced among business-to-business buyers, says researcher Robert St. Louis.